BOC State of Play:Housing Inflation Slows,Household Debt Rises

By Yali N'Diaye

     OTTAWA (MNI) - The mix of data during the week showed housing price

inflation slowed in July and August, a welcome development for the Bank of

Canada, still counting on the combination of higher rates and macro prudential

measures to cool down housing.

     Household debt, however, is unlikely to move down the list of financial

vulnerabilities. Statistics Canada reported Friday that household credit market

debt represented 167.8% of disposable income in the second quarter, reaching a

new record high. This should keep the BOC on alert as to the response of the

economy to interest rate hikes, and encourage a gradual approach to tightening.

     Housing, however, was not the one to blame for the increase: mortgage

borrowing decreased $2.6 billion to $16.5 billion, while consumer credit and

non-mortgage loans increased by $6.1 billion to $12.3 billion.

     In fact, while existing home sales recovered 1.3% in August, fueled by a

14.3% gain in the Greater Toronto Area, the Canadian Real Estate Association

revised down its sales forecasts to 506,900 for 2017, with sales expected to

further decline by 2.3% in 2018.

     In addition, CREA warned higher interest rates combined with tighter

mortgage rules pose a downside risk to its sales forecasts.

     On the price front, the outlook is also turning more negative, with the

national average price expected to edge down 0.6% in 2018. 

     Statistics Canada reported Thursday that Canada new house price growth

slowed to 3.8% year-over-year in July from 3.9% in June.

     In Toronto, which represents one fourth of the index, where the BOC had

warned against overvaluation, prices were unchanged on the month, for a 12-month

increase of 7.4%, the smallest since September 2016.

     In August, based on the more comprehensive Teranet-National Bank National

Composite House Price Index, prices were up 13.1% year-over-year after rising

14.2% the previous month.

     Earlier this week, Moody's Analytics said, "the national housing market in

Canada looks like it is set for several years of retrenchment." 

     In addition to tighter mortgage rules and higher mortgage rates, analyst

Andres Carbacho-Burgos cited slower real income growth as a result of monetary

policy tightening, along with reduced speculation in the Toronto and Vancouver

areas.

     That being said, none of the scenarios are betting on a housing crash, and

would actually fit the BOC's own vision of a soft landing, allowing the central

bank to continue to gradually tighten.

     Besides, DBRS said in a commentary earlier this week that "a correction in

housing prices in Ontario and (British Columbia) in isolation is unlikely to

cause major disruption to their local jobs markets."

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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