Rising interest rates later this year could trigger Canada’s housing market to collapse, according to a new report by Capital Economics.
This is a sharp departure from most other forecasts that see 2011 as a steady year for housing. Capital Economics calculated Canadian home prices falling by about 25 per cent to even as much as 35 per cent over the next three years as the Bank of Canada starts to tighten its monetary policy.
Many predict the central bank to push the interest rate up to two per cent by the end of the year from its current one per cent mark, and that it’ll return to the 3.5 per cent normal level by the end of 2012.
“Even small rises in official interest rates have been shown to have a big effect on homeowner confidence in other countries under similar circumstances,” Capital Economics chief Canadian economist David Madani told The Canadian Press. “If the Bank of Canada does resume its monetary tightening this year, this could easily prove to be a tipping point for a house price collapse.”
If prices did decrease by 35 per cent, the Canadian Mortgage and Housing Corporation (CMHC) could suffer losses of $10 billion as about 10 per cent of higher risk mortgages default.
Meanwhile, for the week of Mon. Feb. 7, TD, CIBC and RBC all raised their special mortgage rates.