The Bank of Canada hiked interest rates another 25bps to 1.00% today, surprising most. As noted last time (following the July interest rate hike) Canada’s housing market is running hot, and has all the hallmarks of a property price bubble. We’ve looked at the Canadian property market valuations a number of times and there is a clear case of extreme overvaluation, in addition to high and rapidly rising property prices, household leverage metrics remain at stretched levels. It makes for a fragile backdrop should interest rates rise rapidly and significantly, and today’s rate hike is a further step in that direction.
We talked about this problem in the latest edition of the Weekly Macro Themes in regards to the "CANZ Economies" - this is Canda, Australia, and New Zealand. All three economies have significantly overvalued housing markets (see the chart below) and as discussed in the report, all have stretched household leverage. They also share other commonalities such as commodity sensitivity... and they all call their currencies 'dollar'. I would say that if one of the CANZ economies runs into trouble there is a reasonable chance of contagion across the 3, although simultaneous problems are probably more likely than contagion as such. Anyway, it is a risk to keep on the radar, and the leading indicators of stress such as interest rates, unemployment, and house prices should be kept front of mind.
The Bank of Canada has now hiked interest rates twice (25bps in September and July) to 1.00%
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The CANZ Economies - Canada, Australia, and New Zealand, share the common vulnerability of extreme overvaluation in their property markets. They also all have high household leverage ratios.
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Article by Top Down Charts