Canada surprise rate cut keeps housing party going

Wed Jan 21, 2015 6:57pm EST
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By Andrea Hopkins

TORONTO (Reuters) - A surprise move by the Bank of Canada to cut interest rates on Wednesday could reignite Canada's housing market and renew fears of a bubble, just as the market had finally begun to cool after a five-year run to record prices.

Canadian housing prices have risen 36.8 percent on average since mid-2009 and the average home price has doubled over the past decade. Last month, the central bank said the housing market could be overvalued by as much as 30 percent.

But concerns about the effect of oil prices that have fallen in half this year overrode worries about stoking a housing bubble on Wednesday, and the bank cut its benchmark rate to 0.75 percent from 1 percent. The energy sector makes up about 11 percent of Canada’s GDP and about one quarter of Canadian exports in 2013.

"This means everyone is going to get back in the saddle and we're going off to the races again," said Toronto real estate agent Steven Fudge. "It creates a sense of relief that we haven't seen the top of the market."

Canada's housing market paused in 2009 but didn’t collapse as it did in the United States, and prices have risen as low interest rates helped Canadians boost their borrowing to buy ever more expensive homes. According to the RBC Housing Affordability Index, it takes 47.8 percent of a household’s pre-tax income to service the cost of owning a standard two-story Canadian home at current market values.

"The real estate market has nine lives. Every time it's supposed to slow down, something keeps the party going," said Benjamin Tal, senior economist at CIBC World Markets.

Tal said that while a drop in interest rates by 25 basis points may not impress homebuyers who have come to believe cheap money is normal, it raises the risk that indebted Canadians will take on more debt.

"With the debt situation relatively elevated, cutting interest rates and adding fuel to the fire is not exactly the best thing for this situation," Tal said.   Continued...

The Bank of Canada building is pictured in Ottawa March 3, 2009. REUTERS/Chris Wattie