The Bank of Canada is not entirely sure how much the new mortgage rules will slow the housing market, despite releasing forecasts in its Monetary Policy Report.
The Central is now less bullish about Canada’s economic growth and it attributes that revision in large part to the recent mortgage rule changes, which the Bank expects will cause a 10 basis point dampening to GDP this year and 30 basis points next year.
“The second major issue in our deliberations was the federal government’s recent move to strengthen mortgage markets. This is a welcome development, as it will mitigate financial vulnerabilities over time,” Governor of the Bank of Canada Stephen Poloz said in the opening statement for the report. “We expect it to reduce housing resales in the near term, and perhaps cause a shift toward the construction of smaller homes, which together will shave some spending in the economy.
“Although this effect is very uncertain, we have incorporated a shock of minus 0.3 per cent by the end of 2018, which is about half of our revision to the export outlook.”
However, when pressed, Poloz admitted the effect could be even greater.
“It’s a highly uncertain figure … our best guess is that it will slow down housing resales, but it may not,” he told reporters on a conference call, following the release of the report. “(The impact) could be bigger but it could also be smaller.”
According to Dr. Sherry Cooper, chief economist with Dominion Lending Centres
, the housing initiatives will have a major impact on home re-sales.
“Government sources say they expect the growth in housing re-sales to decline 8 percentage points in 2017 from the forecasted 6.0 percent growth pace this year,” Cooper wrote in a research note. “Private estimates of the negative impact of the new housing measures on overall economic growth vary, but most expect the contractionary effect to be roughly a 30-to-50 basis point reduction in growth over the next twelve months.
“Given that baseline potential growth is less than 2 percent, this is a very material dampener.”
Canadian economic growth was revised down from 1.3% in July to 1.1%; 2017’s growth was revised down from 2.2% to 2%.
BoC rate announced
New rules will pave the way for a less anxious BoC—analysts