Bank of Canada Raises Rate Incrementally
Canadian home owners are still enjoying unprecedented low borrowing terms; however, the ever-lowering trend is coming to an end. On June 1, the Bank of Canada announced that it had increased the overnight lending rate from 0.25 to 0.5 percent, making Canada the first G7 nation to increase rates since the financial crisis of 2008. The increase is incremental, but significant in that it is the first policy reversal in nearly three years of measures intended to stimulate the economy.

Mark Carney, the BOC's Governor was compelled to raise rates after seeing a notable 6.1 per cent annual rate increase in the GDP in the first quarter of 2010. The banks have taken the early success of the Canadian economy as an opportunity to mitigate inflation and to prevent Canadians from further overextending their credit. While emergency lending levels of the last year drove the unprecedented recovery of the housing market last year, they also increased household debt and property prices. Though incremental, this precautionary BOC measure is designed to bolster the domestic economy in the context of lingering instability in the global economy.

Market Correction Imminent
The new rate is likely to slow purchasing activity in an overheated housing market, while it produces greater levels of resale housing inventory and price correction. According to Scotiabank economist Derek Holt, the hike is small enough that borrowers will be able to negotiate the higher rate by lengthening amortization schedules or through smaller principal payments.

Market correction will depend on the rate at which sellers are willing to adjust their prices, the pace at which homes are brought to market, and how substantial employment growth and rising incomes prove to be. Correction of the Canadian housing market will be less pronounced than the U.S. adjustment, but a correction it will be. The average price of a house in Metro Vancouver is currently just over $1 million.

Good News for New Buyers
For new buyers, this change will present an opportunity to enter the property market. If you are thinking about buying a home, now is a good time to begin working with a Realtor, so that you will be ready to take action when prices correct. Home owners who are concerned about paying their mortgage should contact their lending institution, as there are typically options for revising their payment schedules.