The Bank of Canada raised its benchmark rate to 1.25% on January 17, 2018. This is a quarter-percentage-point increase. It is the first time since 2009 that the overnight rate was more than one percent. This pushed the posted interest rate for five year fixed rate mortgages above 5% for the first time in four years.  

This was done in response to news that unemployment rate since 1976, strong job gains and good GDP growth. Growth hit 3% in 2017. It is expected to hit 2.2% in 2018.  

The Bank of Canada warned that future interest rate hikes may not happen, since the economy is likely to slow in 2018. The biggest threat to the Canadian economy is the renegotiation of NAFTA. We’re already seeing businesses reluctant to invest in Canada, causing an estimated 0.3% drag on growth  

Note that the base assumption by the Bank of Canada is that NAFTA will remain in effect. However, Canadian growth is already slowing because businesses are afraid to invest in Canada and end up on the wrong side of a tariff increase. The U.S. lowering tax rates on money repatriated to that country is also leading international companies to relocate money and, sometimes, operations back to the U.S.  

Investors are betting on stable to slight rate hikes later in the spring. Economists think interest rates to be increased at least twice this year, though the odds and timing depend in part on NAFTA negotiations.  If the NAFTA negotiations stretch past the July Presidential election in Mexico, then Poloz may raise rates based on economic data regardless of the state of the trade agreement.  

Governor Poloz said the high level of household debt (hitting a record 168% of disposable income last year) makes the nation too sensitive to the effect of interest rates rate hikes to raise them quickly. 

This is partially why the hot housing market was attacked by making it more difficult to secure a mortgage instead of rate hikes. For example, foreign buyers trying to buy property in Vancouver and Toronto are now subject to a 15% tax in an attempt to slow down their purchases of property in these two, hot markets. This is why stress tests were expanded to include those who put 20% or more down on a property, the higher standard used for stress tests, and the end of the government backstopping mortgages worth more than a million dollars.  

The stress test in particular is causing many potential borrowers to drop out of the housing market. The stress test requires borrowers to qualify either based on the Bank of Canada posted rate for a five year mortgage or two percentage points above their current contracted mortgage rate. The fact that the OFSI seems to have left in a loophole that borrowers could qualify on a longer amortization doesn’t make much of a difference. Amortizing over 35 years, for example, wipes out the higher qualification rate, increasing their buying power.  However, a longer loan means they pay more interest over the life of the loan. Other borrowers will lower their price point and buy something smaller, cheaper or in a less desirable neighborhood.  

Loan to value ratios have been ratcheting up, while the government essentially outlawed bundled loans to get around LTV limits. Brian DePratto, a Toronto-Dominion Bank economist, said these OSFI rule changes alone would depress demand for Canadian real estate five to ten percent and reduce home prices two to four percent in 2018.  

The only people unaffected by these changes are cash buyers. They’re going to find increased supply and flat to slowly rising home prices. The only exception would be those trying to find an affordable home in Toronto or Vancouver. However, today is an ideal time to talk to a Fort McMurray mortgage broker. Secure a mortgage today, before it becomes even harder to qualify for a home loan