MNI INTERVIEW2:Canada Housing Resilient to Slow Rate Rise-CMHC

Canada’s hot housing market will be resilient to the modest path of interest-rate hikes expected from the central bank, even as a generation of heavily indebted homebuyers gets their first taste of higher refinancing costs, the federal housing agency's chief economist told MNI.

“The Bank of Canada I think has pretty clearly signaled that over the next little while, we're going to see interest rates move higher” and they will end the reinvestment phase of QE after that, Bob Dugan said. “Canadians buying homes are going to face higher mortgage rates starting later this year, and into next year. That will cool demand somewhat, it will take some of the pressure off house price growth.”

CMHC is a cousin agency of the central bank and doesn't consistently publish a forecast of the policy benchmark rate, but many economists predict three to five hikes this year from today's record low 0.25% starting as early as March. The BOC, the banking regulator and CMHC have warned the housing market has become a major risk to financial stability, but Dugan said the issue now isn't dominated by higher rates.

“There are good macro prudential policy measures in place, which I think will protect us against all the most plausible scenarios for interest-rate increases,” Dugan said.

The "stress test" imposed a few years ago where borrowers must prove they can afford to borrow at rates several percentage points higher than what they sign for is a big buffer, Dugan said. Many homeowners are also locked into longer-term mortgages and are shielded for a while from higher rates, he said. Canada's main mortgage is a five-year fixed rate.

COST OF LIVING PRESSURES

While supply-chain issues may push up new home prices again this year, the BOC may be able to pull inflation back to its 2% target without a massive rate shock, Dugan said. New home prices rose 10% last year, the most since 1989, a time of instability in Toronto's housing market.

"There could be some material cost increases because of the supply chain effects, that would increase the price of the built homes. But on the resale side, I think there's going to be a better balance between supply and demand because of higher mortgage rates, and that will sort of take away some of the upward pressure on house prices.”

“It looks like long-term inflation expectations have remained low, and it's just getting through this temporary hump with higher interest rates. Hopefully it will be something that can be managed with modest interest-rate increases," Dugan said.

The housing market faces risks from strong price gains, lagging supply and overvaluation in some key markets, Dugan said. "The level of prices by fundamentals like mortgage rates, incomes, and population growth, those things contribute to the growth of house prices, but growth in prices got to the extent that we can't fully explain it by those factors."

Dugan also defended Statistics Canada's measurement of the cost of living, criticized by some opposition lawmakers, saying the CPI basket is doing its job of tracking a typical household. “I don’t think the CPI was ever trying to capture the impact of homeowner shelter costs at the margin the way some people maybe think that it should, because that makes the CPI basket un-representative,” he said.