With a wave of five-year fixed mortgage rate resets to take place in 2020, a Macquarie Group economist has warned of possibly serious risks to the economy and the housing sector.
The danger would be especially pronounced as the residential property market is currently recovering, according to David Doyle.
“Where I get more concerned about housing actually is, as we move into 2020, is that the rate reset of five-year fixed rate mortgage holders moves higher again, 75 to 80 basis points,” the Macquarie Group North American economist and Canadian markets strategist told BNN Bloomberg.
“So that for me is a risk for 2020, that potentially, there’s another bout of weakness coming for housing across the country.”
He added that the Bank of Canada’s current policy stance of holding rates steady is the correct route, considering economic realities.
“There’s all these downside risks out there in part due to global trade tensions, but also because of what’s going on in the housing market,” Doyle said. “So I think for them to be in a wait-and-see-mode right now is appropriate.”
Earlier this month, BoC governor Stephen Poloz stated that the benchmark interest rate will most likely go up. The central bank’s hike freeze since October 2018 came about due to global economic instabilities, along with Canada’s current household debt levels and the U.S.-China trade war.
“All of those things are kind of holding things back and the lower interest rates kind of push back and keep us at unemployment at a 40 or 50 year-low. So that’s balance,” Poloz explained. “And that balance can shift when some of those headwinds dissipate.”
“The natural tendency is for interest rates to still go up a bit… But it depends on our forecast coming true that the slowdown is temporary and getting through all that and getting back on the track we were [on] say a year ago.”