Cooler housing market expected after rate hike

Days of big price gains end for a while. B.C. housing markets will "cool off and level out" this year as the fifth Bank of Canada interest-rate hike in the past six months creates conditions that dampen economic growth in the provinceBusiness Council of B.C. executive vice-president Jock Finlayson said Tuesday.

The central bank boosted its trendsetting rate by a quarter-point Tuesday to 3.75 per cent, causing chartered banks to increase the prime lending rate to 5.5 per cent while some also hiked variable-rate mortgages by a quarter point.

"Higher rates won't throw us into a downturn but they'll be one of the factors that lead to some cooling off in housing markets for sure," Finlayson said in an interview. "The days of significantly escalating house prices have come to an end, at least for a while."

The surging Canadian dollar fell 0.81 cents US Tuesday to close at 86.92 cents US, amid financial market concerns that Canadian interest rate have almost peaked.

The Bank of Canada said some "modest further increase in the policy interest rate may be required" to keep inflation between the central bank's target of one to three per cent.

Previous statements appeared to signal more strongly that rate hikes would definitely be needed.

Finlayson expects higher interest rates will help constrain B.C.'s economic growth this year to 3.3 per cent, down from an estimated four-per-cent growth rate in 2005.

"That's a somewhat weaker economy for B.C. but still strong economy by Canadian standards," he said, noting that Ontario's economy is expected to grow by two per cent or less this year.

Real Estate Board of Greater Vancouver president Georges Pahud said recent rate hikes in Canada won't have a significant impact on the housing market.

"Obviously it makes things a little tougher on people who are close to the margin in terms of qualifying for a mortgage," he said.

"But the impact of rising interest rates is pretty much offset by increases in wages."

The high-flying Greater Vancouver real estate market experienced a 4.1-per-cent decline in sales last month when compared with February 2005, the first year-over-year decline since last March. The real estate board said there were 2,941 sales on the Multiple Listing Service, down from 3,068 sales a year ago.

"The market is still very robust," Pahud said. "We still have multiple offers on some properties, there's still a shortage of product and people still believe in real estate as an investment . . . We'd need to see a sudden, unexpected interest-rate increase in the two-point range before there's a significant negative impact."

Credit Union Central of B.C. chief economist Helmut Pastrick expects 2006 housing sales will be similar to last year, although rising interest rates will reduce house-price increases this year. He expects B.C. house prices to rise by about 10 per cent this year, down from 14 or 15 per cent in 2005.

"I think the B.C. economy is strong enough to absorb [higher interest rates]," Pastrick said. "But in Ontario, where the economy is weaker, I suspect the impact would be more noticeable on their housing market and related sectors."

Retail BC president Mark Startup said most retailers in the province report that higher interest rates have not hurt sales or affected consumer confidence.

"No one seems worried right now," he said. "But if the trend towards higher rates were to continue for another six months, they'd be very concerned."

Finlayson expects the Bank of Canada will take a pause from its rate-increasing activity by the late spring because there is no evidence of "significant inflationary pressure" in the Canadian economy.

(prepared by Bruce Constantineau/Vancouver Sun)