Loonie Lurches Higher on Upside Housing Surprise

Andamento del mercato - 08/11/2017

The gradual rise in interest rates and high level of household indebtedness has led to many dire forecasts about the outlook for the Canadian residential real estate sector.  Between surging prices that have hurt affordability and the rampant speculation that has made Canada among the hottest property markets, signs have emerged throughout the year that the sector was overextended.  Apart from the collapse of a significant alternative mortgage lender last spring, the IMF and other international organizations have issued warnings on the outlook.

Nevertheless, data unveiled earlier appears to indicate a resurgence in the upside momentum for the industry.  Building permit figures released by Statistics Canada showed a 3.80% increase during the month of September, topping estimates of a -0.20% contraction while erasing part of the higher revised -5.10% decline recorded in August.  Adding to the sense of optimism was the housing starts figures published by the Canadian Mortgage and Housing Corporation.  The annualized amount of construction that commenced during October unexpectedly rose to 222,800 units from an upwardly amended 219,300 starts begun a period earlier.

Taken together, these figures present a more positive outlook for the industry despite the looming problems emerging in the backdrop.  Household indebtedness remains the key issue that could sink the Canadian housing economy.  The Bank of Canada recently warned on the development after embarking on two successive rate hikes earlier this year.  As interest rates continue to climb, households may slip deeper into the red as they borrow more to finance regular expenses.

The IMF has also joined the chorus of institutions concerned by the rapid pace households have amassed debt.  While both institutions are comfortable that the Canadian banking sector could handle the shock of a decline in housing prices, consumers with significant outstanding balances may not be as immune from a real estate sector selloff.  With monetary policy tightening not expected for another few months, any downward reversal in the housing sector could be a warning sign for the Canadian economy at large.  Meanwhile, the Loonie has embraced the positive news, sending USDCAD tumbling back below 1.2750 earlier after a sharp rebound on Tuesday.


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