NEW YORK--(BUSINESS WIRE)--The Bank of Canada's 25bp cut in interest rate targets on Wednesday underscores Fitch Ratings' view that the Canadian economy has weakened and that overvalued housing markets are at risk of declines.
The Bank of Canada expects second-quarter negative growth before the economy recovers in the second-half. The energy and commodity sector, where low prices have led to sharp falls in investment, is the cause of this underperformance. The non-resource sector is growing and continuing to create jobs, although exports to the US have disappointed in 2015 despite a more competitive current account deficit.
Given the current rate environment, which has been at near-record lows for several years, Fitch does not expect the rate cut to have much impact on market mortgage rates, or on affordability for current borrowers.
Fitch views housing markets nationally as approximately 20% overvalued in real terms, with modest variation across provinces. However, a number of positive market factors are expected to moderate any negative price pressure. Most importantly, the Canadian mortgage market does not have significant exposure to riskier mortgage products that would be at high risk of default.
However, some regional markets are showing signs of weakness. In Alberta, where low energy prices have been placing downward pressure on the economy, prices have been volatile. Calgary prices are down approximately 3% since October 2014, according to data from Teranet. In Quebec, where GDP growth has trailed that of the nation overall, prices have trended flat-to-downward in real terms for several years now. However, Toronto and Vancouver continue to set new home price records and are less likely to fall, being supported by stronger economies and population growth.
Overall, Fitch continues to expect a soft landing nationally, where the price growth that has characterized the country's housing markets for more than a decade will abate, with modest declines to follow. While Fitch expects modest price declines in the medium term across the country, significant downturns remain unlikely. But, downside risks exist, particularly in markets that have been dependent on robust construction and real estate activity in recent years.
Additional information is available on www.fitchratings.com
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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