The Bank of Canada should hold off cutting interest rates to avoid sending rising home prices even higher, risking a correction later, said the head of Royal LePage, the country’s largest real estate services firm.
“It seems premature to ring the recession alarm bells now, injecting further monetary stimulus,” Phil Soper, chief executive officer of both Royal LePage and its parent company, Brookfield Real Estate Services Inc., said in a report Tuesday. “The country’s all-important real estate market simply does not need a rate cut.”
The Bank of Canada meets Wednesday, and 16 of 29 economists surveyed by Bloomberg forecast it will cut the overnight lending rate by a quarter point, to 0.5 percent. It would be the second reduction this year, pressuring Canada’s lenders to lower their own prime rates, which control the pricing of variable-rate mortgages and other loans.
Risks to the nation’s housing market include persistently low oil prices dragging on home values in provinces including Alberta, economic distress in Europe should the deal with Greece fall apart, and a capital-markets crisis in China, according to the report. Those issues aren’t enough to warrant a rate reduction because Canada isn’t in a recession, and a cut may cause real estate demand to overheat, Soper said.
“I worry that stoking this engine further could move us from a perfectly manageable major market expansion into a more difficult correction, as price levels decouple from more household incomes,” he said in the report.
Residential real estate transactions are likely to reach a record this year in Canada, according to the report. Toronto home sales rose to a record in June for the third straight month, and Vancouver transactions jumped 28 percent from a year earlier, according to local real estate boards. The average detached home in both cities now sells for more than C$1 million ($785,000).