Ross Kay Realty Consultants Chief Strategist Ross Kay offers the following insights on today's Bank of Canada announcement.

Quote:

" As forecast, the Bank of Canada made the decision to increase its target for the overnight rate by 25 basis points which rises to 1.50% as of this morning.  Reading the housing market data and it's impact on homeowners across the nation, we maintain our position this may have been the last opportunity the Bank of Canada will have this year to raise rates."
-Ross Kay, Chief Strategist, Ross Kay Realty Consultants

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Insights:

- Relying upon the housing market as it was functioning in the fall of 2017 and it's subsequent impact on the overall economy in  the first half of 2018, The Bank of Canada increased its policy rate by 25 basis points today, the second increase in 2018  

- A press release issued by the Bank touched upon a slow down in the housing market but did not address the lag in data being used to make today's decision which gives us cause for concerns we have stated previously. The common move from investment in residential real estate by business owners now seeing lesser opportunity for further investment gains previously found there, was addressed by the Bank.  The Bank acknowledged an increase in Business investment but did not tie it to withdrawal from the residential housing market. 

- We expect the Bank to feel pressure going forward as the spring housing market data and the lost net wealth of Canadians from falling property values through the first six months of the year gets reported in later readings of the economy.

- The Bank continues to suggest new mortgage lending rules and rising interest rates are the cause of lower sales and falling prices when our data clearly shows that slow down began months in advance of the new rules being implemented. This repeats the pattern of misreading the market that began with Alberta in 2014, repeated in British Columbia in 2016 and continued today with Ontario.

- Going forward, the ability of the Bank to increase rates further will be tested on what kind of a drag a correcting housing market will cause. The phenomenon known as the "Mortgage Interest Rate Trap" may begin to be recorded through the Bank's difficultly to raise rates going forward. While it is technically possible to raise with the new lending rules now in place knowing how Mortgage Lenders will react in utilizing the flexibility provided to them in the rules design is untested.

- Growth in Consumer spending which relies upon home equity gains to continue that growth was mentioned in the Bank's video presentation but the impression given is the correlation that exists is not fully understood.  There was no mention of recent changes in the housing stock coming onto the market during the last two months which suggests the Bank was not aware of what those changes are recording. 

- The Bank failed to mention the risk that a declining mortgage book naturally causes in an economy and continued the new false narrative that a housing market can "stabilize" a term only created this year by bank economists hoping to protect their bank's share values. 

-Overall, our forecast of a correcting housing market placing the economy at risk of a recession continues. The magnitude of the importance of the housing market on the Canadian economy could not be sustained and the pressures of the Bank and governments will only increase this fall as a "stablized" market itself would mean an economy at risk.
We are increasingly concerned that the Bank does not understand that the new mortgage stress test has provided it with flexibility in rate decisions previously not accessible.  The Bank does not mention this new found flexibility and as such we see the remainder of the year creating little opportunity for further increases. 

You can reach Ross Kay through rosskay@rosskay.com