Mark Blinch
The resurgence in Canada's residential real estate market might be too much of a good thing for the Bank of Canada, Toronto-Dominion Bank economists say.
"The Reserve Bank of Australia surprised markets today by hiking rates, and cited significant growth in housing credit and dwelling prices as part of the justification," TD economists Craig Alexander and Grant Bishop said in a research note Tuesday. "The Bank of Canada could very well follow suit if Canadian real estate continues to heat up."
Here's a look at their report:
Real estate roars back
"The performance of Canada's real estate markets during the economic downturn has been remarkable," the TD economists wrote. "In the second half of 2008, there was a dramatic pullback in sales that led to a retreat in prices. However, the weakness proved surprisingly short-lived … "The Bank of Canada's unprecedented easing of monetary policy in response to the financial crisis set the stage for record low mortgage rates, which, when combined with falling home prices, fuelled a sharp improvement in home affordability," the TD report said.
According to Canadian Real Estate Association statistics, the number of resale homes that changed hands in August was up 18.5 per cent year over year and average prices were up 11.3 per cent year over year.
"The key issue is whether the low interest rate environment is creating an economic imbalance that requires a rebalancing of monetary policy."
If the market cools, no worries
"Overall, the most likely scenario is that home sales growth will moderate and home price growth will not become excessive. Recent comments from the Bank of Canada suggest that they also believe the recent strength in MLS sales is temporary," the TD economists wrote.
If price pressures remain in check, the Bank of Canada "can deliver on its conditional commitment not to raise rates until June, 2010, and it might be able to wait until late next year to begin gradually tightening policy," the TD report said.
"However, there are always risks for a forecast. If the economy stumbles or the Canadian dollar soars, the future rate hikes could likely be delayed even further. Similarly, should the current stance of monetary policy prove too stimulative, the bank may feel the need to go sooner and/or more aggressively," they wrote.
But if home prices keep bubbling, the central bank might raise rates
If the real estate market momentum does not moderate in the coming year - "or worse still, if price growth accelerates - it could lead to an earlier and more substantial tightening in policy than currently anticipated," the TD economists said.
"There is a material risk …that real estate may not cool.
"The persistence of extremely low mortgage rates might induce more buyers into the market and speculation could take on a greater influence.
"If so, the question is whether this could provide a tightening in monetary policy, even in an environment where inflation as measured by the Consumer Price Index is at, or below, the Bank of Canada's 2 per cent target."