TORONTO - Another hike in borrowing costs Wednesday is likely to further soften Canada's housing market, but a major think tank says the slowdown in recent months won't produce a "freefall" in demand.
The Bank of Canada raised interest rates another quarter point -- the third such increase in a month -- and the banks bumped up their prime rates by the same amount, pushing up the costs of mortgages linked to prime.
But the Conference Board of Canada says it sees a pause in the real estate market -- not a U.S.-style collapse -- after a surge in prices for the last several years in most Canadian cities.
"The housing market has lost its lustre," Mario Lefebvre, director of the board's Centre for Municipal Studies, said in a report Wednesday.
"No doubt about it. However, this will not lead to a freefall for Canada's housing market. This country will not experience home price declines to the tune of what we have witnessed in the United States over the past few years."
Canadian housing price increases in recent years were fuelled by low borrowing costs and strong consumer confidence linked to Canada's solid recovery from the 2008-2009 recession.
In the United States, the housing bubble burst mainly because of risky lending practices by major banks, which saddled them with hundreds of billions of dollars in bad loans that eventually led to widespread foreclosures and the collapse of many regional banks and some Wall Street financial companies.
The troubles in the U.S. financial industry sparked the recession and reverberated across Europe and other parts of the world.
In its report, the Conference Board predicted weaker new home and resale housing sales in Canada over the next several months because of slower economic growth, the impact of new harmonized sales taxes in Ontario and B.C. on July 1 and eroding consumer confidence.
"But we're not the U.S," asserted Lefebvre. "The house price bubble in the United States came about due to elements that have less to do with economic fundamentals than with U.S.-specific laws, like mortgage deductibility for tax purposes and the ring-fencing of mortgage debt, such that the lender can't pursue the other assets of a mortgagee.
"If anything, Canada will see a pause in home price growth with possible marginal declines in a few markets, but nothing near what the United States has been through."
In recent weeks, economists have debated how far the Canadian housing market will fall -- with some predicting a sharp decline and others expecting only moderate price drops.
