Recently released first quarter numbers for economic growth in Canada might seem a bit underwhelming. Stephan Poloz, the Governor of Bank of Canada, outlined 2 reasons for this; a slowing of the housing market and weak exports.
However, even with the unsatisfactory results from Q1, the outlook for Q2 is still fairly optimistic.
Rather than normal housing purchases happening in Q1 of 2018, a lot of buyers were rushing to squeeze these purchases into Q4 of 2017. This was due to foreseeable regulatory changes and a tightening of mortgage rules in January.
With the slowdown in housing sales in Q1, it might not be exactly what it seems. In Haider-Moranis December 2017 Bulletin (which can be found by clicking here) they outline why this potential slowdown might not be a sign of a weakening housing market, but rather a byproduct of the likely rush of purchases happening before the tightening regulations.
As stated earlier, Poloz is optimistic about Q2. He believes that the composition of growth will shift from household spending to business investments and exports. This shift would be due to several factors; rising interest rates, reduction in the availability of credit, and higher mortgage payments. (For More info on rising interest rates see links provided at the end of this post).
When calculating a household’s net worth, the increased value of the house relative to the outstanding mortgage must also be taken into consideration. When the value of real estate declines, household wealth declines with it. This happens because the equity on the house is often leveraged to make other substantial purchases like vehicles, and as that equity decreases, access to credit becomes more difficult to attain. Less availability of credit decreases the likeliness and willingness of consumers to spend.
Tighter mortgage regulations and higher lending rates will limit buyers from spending more than they can afford on housing. This higher cost of housing may depress housing prices, and could even usher in a collapse in residential real estate prices.
Some will be happy to hear housing prices may be starting to normalize or decrease, especially millennials looking to buy their first home. However, when housing prices collapse, big-ticket purchases aren’t the only thing affected.
Higher interest rates are likely to effect the frequency and volume of purchases the average consumer often chooses to finance. Auto loans as well as credit card financing costs are likely to increase substantially, putting pressure on the auto and retail industries. Spending on leisure activities or other non-essentials is likely to diminish as well. This, in turn, affects employment and throws the economy into a cycle of slow growth or perhaps even declining economic outputs.
A single-purpose policy of slowing housing markets could slow the overall economy. We do trust the Bank of Canada has this in mind and is willing to adjust things quickly as we overcome the Q1 economic numbers and set our sights on Q2 and the summer vacation season.
Negative Impact of Rising Interest Rates
Interest Rate Hikes… Maybe Not All Bad?