Executive from Scotiabank delivers verdict
Despite lingering concerns from the Canada Mortgage and Housing Corporation (CMHC) and others about the precarious nature of the country’s housing market, there remains little risk of a crash, according to Scotiabank vice president and head of capital markets economics Derek Holt (pictured).
He told Canadian Mortgage Professional that while interest rate increases were imminent, most signs indicated that the market would be able to withstand the impact of an end to those record-low rates.
“The large increase in cash balances that occurred over the pandemic combined with the record-high amount of home equity on Canadian balance sheets, to me, paints a picture of a household sector that can manage the rate shock we’re likely to get,” he said.
CMHC raised the housing market to its highest risk level at the end of September, describing that change as a reflection of “intensified and persistent imbalances in several local housing markets across Ontario and Eastern Canada.”
In its most recent rate announcement, the Bank of Canada announced that rock-bottom interest rates – described by CMHC as one of the main reasons for the feverish intensity of the housing market – were likely to begin climbing around the middle quarters of 2022.
However, Holt said that predictions in recent decades that the market would plummet had proven wide of the mark, with little indication that that scenario would come to pass in the near future.
“I’ve seen many of these narratives, and I’m still waiting for it to happen,” he said. “We suffer temporary setbacks and it always seems to rebound. The way I look at it is: in our forecasts, we do have housing as a bit of a drag on GDP growth going forward, but not a crash scenario by any means.”
Holt said that rate increases were unlikely to precipitate an “incremental shock” compared to what Canadians already had to qualify for under the stress test, with those hikes set to be measured and timely when they do arrive.
“People tend to assume this rate shock is going to happen immediately and it’s going to torpedo things,” he said. “We often forget that that’s not the way the mortgage [market] works, or the housing market, and that there are a lot of other variables changing at the same time.
“The whole point of tightening monetary policy is going to be to cool the interest sensitivity, so we have to be pragmatic in that sense. But I don’t think we should automatically assume that it’s going to pull the rug out from beneath the housing market and create a more dire scenario.”
The announcement that rates would begin rising in mid-2022 was a revision of the Bank’s previous projection of hikes around the second half of next year, a change that was seen to reflect its optimism on Canada’s economic outlook and awareness, at the same time, the continuing risk posed by inflation.
Holt described the Bank’s statement as a “reasonably balanced” message, and one that would allow it to take a flexible approach next year depending on the economic landscape.
“If we get to next spring or so and… they’re still looking at inflation readings that are as elevated as they are now, they might want to start taking out some insurance against being wrong that inflation will dissipate,” he said.
The best way to do that, according to Holt, is to start very gradually reducing rates, with the option of slowing the pace of stimulus withdrawal if it turns out that inflation is falling back again a year or so after that.
“I think you need to get on with it as opposed to putting all your eggs in one basket and assuming inflation will magically disappear,” he said.
Of course, the trajectory of the COVID-19 pandemic continues to throw the biggest curveball of all, with little certainty about where Canada’s economy will stand in 2022 or if a post-pandemic recovery will finally begin to take shape.
With that in mind, Holt said that the prospect of a changing tune on rate hikes couldn’t be discounted – even if he emphasized that it appeared unlikely at present.
“We have to go with the best advice that we get from the scientists that seems to indicate vaccines are effective and we’re transitioning to a different phase away from lockdowns toward vaccine passports and restrictions,” he said.
“[However], if we wound up getting mutations and vaccine effectiveness wanes pretty sharply, then that’d be new information and forecasts, so we’d take that into account. But we don’t see that at this point.”