Piling On

The Week Ahead

July 24, 2017

The pendulum has swung, but does the combination of government policy and the market’s response risk taking us too far on the other side? That’s a question that needs looking at in Canada, where monetary policy, the foreign exchange market’s response, and regulatory changes could produce too much of a slowing in areas of the economy that had been driving growth.

Let’s count the ways, for example, that various forces are working to contain what had been an overly heated housing market. Rising mortgage rates don’t look all that threatening just yet. But OSFI is discussing a step that will bring uninsured buyers (those with properties over $1 million, or with 20% or more equity) into a much tighter regime that would effectively tack on 2% to the rate used to calculate how much debt they can get.

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Assessing Household Debt’s Sensitivity to Higher Interest Rates

In Focus

July 19, 2017

The Bank of Canada is on the move, rates are expected to rise again before the end of the year, and if everything goes according to plan, the Bank might move by an additional 50 basis points in 2018. It’s hardly a secret that the Canadian economy in general, and the real estate market in particular, are more sensitive to higher rates now than in any other time in recent history. But how sensitive?

Headline numbers clearly don’t tell the whole story. To get a full understanding of the impact of higher rates we also have to visit the margins of the debt market spectrum. We conclude that those margins are not wide enough to generate a wave of defaults following the Bank’s expected tightening. Consumer spending is likely to soften due to increased debt payments, while the pace of growth in mortgage outstanding is expected to cool notably as the impact of higher rates is amplified by the expected changes to qualifying rate criteria on the non-insured segment of the market.

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New Faces, New Forces

The Week Ahead

July 17, 2017

Capitol hill may have heard the last from Janet Yellen in terms of formal testimony, but her take on events was only one of several key pieces of monetary policy news this week. New faces, and new forces, will both be in play as we look ahead to the balance of this year and into 2018.

In terms of new forces, two key pieces of the puzzle were on display, both dovish in the near term. Yet another version of health care reform was trotted out, but prospects for its passage remained shaky at best. That stalemate puts the rest of Trump’s agenda on hold, including fiscal stimulus for 2018 that would have accelerated the pace of Fed hikes next year.

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