Photo: James Bombales

For months, industry experts have written about how higher interest rates will affect the Canadian housing market in 2019. But according to one economist, they might not be such a sure thing.

The Bank of Canada (BoC) hiked the overnight rate to 1.75 percent in October, part of an extended plan to slowly raise rates, after years of historically low levels. It is widely expected to do so again in 2019, a move which could exert a downwards pressure on the housing market, as mortgage rates rise and homebuyers’ purchasing power shrinks.

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But high household debt levels might cause the BoC to reconsider, according to Stephen Brown, senior Canada economist at Capital Economics.

“Households are even more vulnerable to higher interest rate(s) than we had previously thought,” writes Brown, in his most recent note. “In that environment, the Bank of Canada’s plan to raise interest rates repeatedly could be a serious policy mistake.”

Brown is referring in part to data released last week by Statistics Canada, which found that over the past year Canadians’ savings rate has dropped to just 1.4 percent of their incomes, the lowest level since 2005.

He writes that the low number — which suggests that Canadian households are in a vulnerable position when it comes to their debt loads — could cause the BoC to reconsider its plan to continue hiking rates.

“The Bank will ultimately be forced to reverse course next year, [and reduce rates],” he concludes.

Still, most industry experts maintain that the BoC will stick to its guns and continue to steadily raise rates in 2019. That’s especially true given that, ever since a new mortgage stress test was introduced in January, mortgage debt levels have been on the decline. In fact, mortgage borrowing fell by $3.6 billion in the second quarter of 2018, according to Statistics Canada.

And, a recent report from the Chartered Professional Accountants (CPA) of Canada found that Canadians’ credit quality remains strong, adding to the likelihood that households would be able to withstand higher interest rates.

“In contrast to the situation a decade ago in the US…the number of borrowers with high credit quality has risen from 66 percent in 2002 to 88 percent in 2017,” reads the CPA Canada report. “In turn, the number of low-credit-quality buyers shrank from 17 percent to three percent over that period.”

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