Canadian policy makers have become increasingly concerned about the overheating of the country’s housing market. Unlike some other markets, like the Nordics, Canada’s market has already started to cool. Though we believe that Canadian real estate market conditions do not imply a U.S.-style housing crash, we do anticipate a long period of cooling in the housing market before it stabilizes in 2011-12, when homebuilding and sales activity come into line with economic fundamentals.
In particular, the Bank of Canada pointed to declining bond yields which have offset some earlier tightening and have kept financial conditions “exceptionally stimulative.” In response to the increase in the benchmark interest rate, six major Canadian banks raised the prime borrowing rate to 3% effective September 10, though it is still well below its 4.65% ten-year average (highlighting the historically low levels of the overnight rate). By passing on their higher borrowing costs in the overnight market to consumers, policy makers hope to discourage excessive debt practices. Should domestic and global economic conditions remain stronger than RGE’s base scenario, the BoC could actually hike rates one more time before the end of 2010 to continue the exit from emerging policy rates. However, there is a risk that the increase in rates will only make some Canadian assets more attractive.
Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients, North America Focus: U.S. Trade Deficit Narrows; “Unusual Uncertainty” in Canada’s Monetary Outlook
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