Photo: James Bombales

It’s been a booming year for the Canadian economy, with annual GDP growth forecast to be 2.9 per cent. That’s in no small part thanks to a red hot housing market — but now that things have cooled slightly, what will the economy look like in 2018?

“The drivers of Canada’s economy are set to shift in 2018,” RBC’s economics team writes in its quarterly economic and financial market outlook. “After several years of housing activity acting as the main engine of growth, changes to regulations in the housing market and rising interest rates are setting up for a moderation in housing resales.”

The team is referring to new federal mortgage rules announced earlier this fall. Starting January 1, a new stress test will require all uninsured mortgage borrowers to qualify against the Bank of Canada’s five-year benchmark rate, or at their contract mortgage rate plus an additional 2 per cent.

Housing Market News Alerts

Sign up now for news alerts on the Canadian housing market

The test is intended to ensure that uninsured borrowers can withstand higher interest rates. The overnight rate — which influences mortgage rates and sat at a historically low 0.5 per cent earlier this year — has been raised 50 basis points since July, with further hikes predicted in 2018.

The combination of the new rules and higher interest rates is likely to cool the resale market for much of 2018.

“We expect rising interest rates will drive the next phase of the [market] correction in 2018 as higher rates add to strained affordability in major markets that ultimately tamps down on homebuyer demand,” reads the report.

So what does this all mean for the economy in 2018? A cooling — but not a drastic one.

“We expect the economy to gear down in 2018 although still grow faster than the economy’s potential growth rate,” writes the team. “In 2018, as the impact of higher interest rates take effect, the economy is forecast to slow to 1.6 per cent.”

It’s a prediction that has been echoed by other economists. TD’s economics team predicted earlier this fall that GDP growth would slow to 2 per cent in 2018 as a result of a cooling housing market.

According to TD senior economist Brian DePratto, Ontario could see the biggest impact.

“If we do see a little more weakness [in Ontario], given we had all that strength coming out of the consumption from housing wealth, that sort of takes away one of the big drivers for the economy,” he told BuzzBuzzNews.

Developments featured in this article

More Like This

Facebook Chatter