With signs that the U.S. and global economies have entered a soft patch and the European debt crisis is continuing to roll, most economists do not expect the Bank of Canada to raise its overnight target rate until early 2012. That would mark a hold on interest rates for the BoC of longer than a full year. The last raise was in September 2010.
The good news is that low lending rates will continue to fuel a Canadian housing market that appears in full bloom. Average prices hit $372,544 in April, up 8% year over year for the third straight month led by a supercharged Vancouver market according to a recent report from the Canadian Housing and Mortgage Corporation (CMHC). This will lead to more strength in housing.
Economists are now predicting a far more gentle approach to monetary policy, with the overnight rate rising to just 2 per cent next year, and to 3 per cent by 2013.
Previously, TD economists had expected the Bank of Canada to take a more aggressive approach, resuming rate increases in July and taking the overnight rate to 3 per cent by mid-2012. There are concerns about how the sovereign debt crisis in Europe will unfold with the main worry on how a debt restructuring would impact European bank balance sheets; whether a restructuring by Greece would set off a series of debt restructurings in other countries, and ultimately whether a Greek restructuring would trigger a new systemic financial crisis. Although Canada has limited direct exposure to the at-risk European debt, the Canadian and U.S. financial systems would be impacted by any significant financial instability that might occur.
Meanwhile, the situation in the United States remains uncertain. Given the enormous inventory of unsold and foreclosed homes, there are clear risks of further home price declines that could weaken consumer spending and constrain the willingness of financial institutions to make new loans.
The latest Canadian housing starts reports that after a strong start in 2010, they moderated, but are expected to edge higher in the second quarter of 2011 after which they will level off. In 2012, housing starts are expected to increase markedly in British Columbia, and Alberta, while Manitoba, Ontario, and Saskatchewan will experience modest growth.
The national resale market has moved from a balanced to a sellers' market. The average MLS price increased by the first quarter of 2011, with the average price of an existing home at $365,648 compared to $342,441 in the fourth quarter of 2010. For the remainder of 2011, the average MLS price is predicted to moderate but should experience an overall increase this year.
Source: The Mortgage Group