Photo: James Bombales

The Canadian housing market is facing significant headwinds heading into the fall, and it’s still unclear how it will navigate them.

From a rising interest rate environment, to worryingly high levels of household debt, there are several factors the industry experts are telling homeowners and would-be buyers to consider.

For a closer look at what could affect the market this month, Livabl has rounded up the latest industry commentary, to keep you in the know.

An interest rate hike is on its way

The Bank of Canada chose not to hike the overnight rate this week — but that doesn’t mean it won’t in the near future.

In its release, the Bank noted that the housing market is “beginning to stabilize as households adjust to higher interest rates and changes in housing policies.” That, combined with an acknowledgement that the debt burden among households is starting to lower, has TD senior economist Brian DePratto predicting that the Bank will choose to hike the overnight rate in October.

“The Bank of Canada made it clear that it is still on track to raise interest rates again this year,” he wrote, in a note. “The Canadian economy is indeed evolving in line with its projections, with the desired rotation of demand towards investment and exports, and a stabilization of the housing market after a difficult start to the year…We believe the BoC will raise interest rates at its October meeting, consistent with its gradual approach to policy normalization.”

As the overnight rate climbs, mortgage rates will also be pushed upwards, possibly causing some would-be buyers to reconsider entering the housing market. Beyond causing a slowdown in activity, a rate increase would weigh on existing homeowners, who might struggle to make higher mortgage payments.

Affordability is deteriorating

As interest rates moved upwards, housing affordability deteriorated in most major Canadian markets last quarter.
The Bank of Canada hiked the overnight rate to 1.50 per cent in July, and mortgage rates followed suit.

The ratio of homeowners mortgage payments in comparison to their income, known as MPPI, rose 0.2 per cent in Q2, after a 1.2 per cent rise in Q1, marking 12 months of consecutive deterioration. In total, seven of 10 major markets saw their MMPI rise last quarter.

“Mortgage interest rates were on the rise for a fourth consecutive quarter in Q2,” wrote National Bank economists Matthieu Arseneau and Kyle Dahms. “Unsurprisingly, the rise in interest rates hit harder for the priciest markets in the country.”

Household debt is still a concern

That deteriorating affordability is bad news for Canadians household debt levels, which are still worryingly high.

“Risks around housing appear to have dissipated with the national market stabilizing in recent months,” wrote BMO senior economist Benjamin Reitzes, in a recent note. “[But] household debt is an issue that isn’t going to be resolved anytime soon.”

While Canada’s debt-to-disposable income ratio eased from 169.7 to 168 per cent in the first quarter of 2018, Canadians still have some of the highest debt levels in the world.

“The [Bank of Canada] is continuously collecting data on how households are coping with rising rates, while the macro data suggest the moves have been manageable thus far,” wrote Reitzes. “The slowing housing market and new mortgage rules have caused debt growth to decelerate, but it’s going to take time to work off debt burdens and bring debt ratios down.”

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