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Bank of Canada supports housing market with surprise rate cut

Canada’s soaring real estate market survived the 2008 financial crisis with barely a scratch. With a surprise rate cut, Bank of Canada Governor Stephen Poloz is trying to make sure it survives an oil price crash.

The central bank cut its benchmark interest rate a quarter of a percentage point to 0.75 percent on Wednesday, an unexpected move it said would buffer the Group of Seven’s largest oil exporter from a 55 percent drop in crude oil since June.

In addition to weighing on inflation, business and government spending, the central bank said the “unambiguously negative” drop in oil prices will be a hit to jobs and income that may rattle consumption and housing.

“The big point here is that this decline in oil prices has been a shock to Canadian incomes, which from a debt-to- disposable income point of view is not good news,” Carolyn Wilkins, senior deputy governor at the bank, said Wednesday in Ottawa. “Certainly the interest rate movement we made today is designed to offset part of that.”

Canada’s housing market has been on a decade-long tear, with the average price of a house in Vancouver rising 67 percent since January 2005 to $638,500 in December. Toronto prices jumped 71 percent in the same period to $521,300, according to the Canadian Real Estate Association.

The mortgages Canadians have shouldered to buy those houses helped send the ratio of household debt to a record 162.6 percent of disposable income in the third quarter.

The bank said the slump in oil will affect housing activity in energy-intensive regions, noting there has been a decrease in housing starts and a “sharp” drop in resales and sales-to- listings ratios in Alberta in December.

CALGARY MARKET

Existing home sales slid 25 percent in December from November in Calgary, the country’s oil capital, while listings rose 36 percent, according to industry data.

“Near term housing activity elsewhere is expected to remain high, supported by very low mortgage rates, although the extent to which the downturn already evident in Alberta will spill over into other regions remains to be seen,” the bank said in its monetary policy report released with the rate decision from Ottawa.

The bank calculates that housing’s contribution to output would drop by 0.6 percent if oil prices stay at $60 a barrel through 2016, relative to $110, according to the policy report.

The bank is concerned “with declining oil prices and the fact that that’s going to detract from the overall economic growth and housing market in the country,” Jim Murphy, chief executive officer of the Canadian Association of Accredited Mortgage Professionals, said by phone. “They take these measures to ensure the Canadian economy is stimulated.”

JOB CUTS

While the drop in oil prices should give consumers a break, the bank said the windfall may be used to pay debt rather than spending and stoking the economy, especially with energy companies such as Suncor Energy Inc. cutting 1,000 jobs.

“With increased risks of layoffs, those households whose incomes rely on the oil sector will have greater incentives to build precautionary savings or pay down debt,” the bank said in its report.

There’s a risk the surprise rate cut may encourage Canadians to increase their debt burden, Peter Routledge, an analyst at National Bank Financial, said.

“The risk is that household borrowing takes off again because you’ve cut rates,” he said. “They’re balancing that off against the risk of letting a period of disinflation that entrenches itself and creates longer-term problems for the economy and the housing sector.”

Canada’s largest lenders, including Toronto-Dominion Bank, have kept their prime rates unchanged so far following today’s move. That rate, which serves as a benchmark for variable mortgages to credit lines have been at 3 percent since September 2010.

“Our decision regarding our prime rate is impacted by factors beyond just the Bank of Canada’s overnight rate,” spokesman Mohammed Nakhooda said today in an e-mailed statement. “Not only do we operate in a competitive environment, but our prime rate is influenced by the broader economic environment, and its impact on credit.”

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