Residential Market Commentary - Getting better, faster

The Bank of Canada has sent two clear signals that things are getting better, faster, than it had expected.

In its latest Monetary Policy Report the Bank announced it expects to hit its inflation target sometime in the second half of 2022, rather than sometime in 2023. It has also rolled back it’s bond buying program from $4-billion a week to $3-billion a week.

Anyone who is involved with a variable rate mortgage or a line of credit will take note of the first signal. The second signal – pulling back on quantitative easing – means more over time. The Bank has been buying those bonds in an effort to keep longer-term rates lower. Many market watchers see the cutback as a strong sign that an interest rate hike is coming.

BoC Governor Tiff Macklem would not be specific when asked about when an increase would come. He explained that uncertainty remains and the Bank will be guided by economic conditions as they develop.

Housing remains a key driver at this point in the pandemic economic recovery. New home construction set a record in March. Starts increased nearly 22% over February, for an annualized pace of more than 335,000 units.

While the Bank believes home price increases are “rooted in [economic] fundamentals”, it says there are signs of “extrapolative expectations and speculative behaviour.”

“Given elevated levels of household debt and the risks that households may overstretch in the face of rising housing prices, we welcome the recent proposal … to introduce a fixed floor to the minimum qualifying rate for uninsured mortgages. New measures just announced in the federal budget will also be helpful. We are watching developments in the housing market very closely,” Macklem said.