Photo: James Bombales

After a rough start to the year, the Canadian economy expanded by 2.9 per cent in Q2, as the housing market finally adjusted to the effects of a new mortgage stress test.

Real estate investment had dropped 2.7 per cent year-over-year in Q1, but a boost in national home sales led to a 0.3 per cent year-over-year increase in Q2.

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“On the domestic spending side, consumers and housing were both better than expected, and much better than Q1,” writes BMO chief economist Douglas Porter, in a recent note.

Home sales rose on a month-over-month basis in both June and July, causing several economists to predict that the market will continue to heat up heading into the fall.

“Looking ahead, a more ‘normal’ pace of growth should prevail,” writes TD senior economist Brian DePratto, in a recent note. “Housing activity seems to have bottomed, and so we expect residential investment to continue making a positive contribution, counterbalanced by disruptions in the energy sector.”

As for what this data means for a possible overnight rate hike, Porter predicts that the Bank of Canada will wait until October to raise rates further. The overnight rate affects mortgage rates, and was hiked to 1.50 per cent in July.

“For the Bank of Canada, it likely required a blow-out upside surprise today to even get them to consider a rate hike next week, and instead we got a very mild downside surprise,” he writes. “Provided there are no big shocks on the NAFTA front, we continue to circle the October 24 decision date as the most likely time for the next BoC rate hike.”

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