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Here’s one way the new USMCA deal will affect the Canadian housing market

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Photo: James Bombales

The Bank of Canada has been steadily raising interest rates for months, with many industry watchers speculating on the timing of the next increase. Now, with NAFTA negotiations resulting in a new United-States-Mexico-Canada Agreement (USMCA), it’s likely the next hike is just around the corner.

Late last night, the Trudeau government confirmed the creation of a new trade deal, which is set to be signed later this year. For months, BoC governor Stephen Poloz has said that uncertainty around NAFTA negotiations was a factor in being cautious about additional rate hikes. Now, the bank will likely move forward with rate hikes at a faster pace.

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“For the BoC, this clearly gives them a green light to hike in October, and does bump the odds of further rate hikes over the year,” writes BMO chief economist Douglas Porter, in a recent note.

The bank’s last overnight rate increase came in July, when it was hiked to 1.50 per cent.

A higher overnight rate causes lenders to raise mortgage rates, which could be bad news for Canadian homeowners, and the housing market as a whole. Those worried about being able to afford costly monthly mortgage payments could be less likely to enter the housing market in the coming months. The country’s measure of household debt to disposable income already sits at 169.1 per cent, one of the highest in the world.

In a recent note, CIBC economists Avery Shenfeld and Katherine Judge write that, should the housing market begin to suffer as a result of interest rate hikes, it is unclear if business investment will be enough to support the economy moving forward.

“We don’t share the optimism that the Bank of Canada sometimes, but not always, expresses on the ability of trade and related business investment to supplant housing as a source of growth as interest rates climb,” they write.

The bank will make its decision at its upcoming meeting on October 24.

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