Globe’s Economy Lab forecasts an imminent rise in interest rates; Toronto housing market waits with bated breath

One thing that could spark a big sell-off in Toronto’s real estate market is a sharp rise in interest rates, as homeowners that were previously on the fence about selling try to cash in before the market softens. So, naturally, anyone looking to sell (or, for that matter, buy cheap) would like to get as much advance notice as possible that an interest-rate hike is coming. Well, economist Stephen Gordon issued such a warning yesterday, suggesting that the interest rate is set to increase much sooner than most observers thought.

From the Globe and Mail:

The relatively hawkish language in the Bank of Canada’s interest rate decision—most notably the removal of the word ‘eventually’ from the sentence describing the conditions in which interest rates will increase—took financial markets by surprise.

Central banks try to avoid surprises when they can, but in this case the Bank has the best of excuses: the facts changed.

The Bank of Canada updates its estimates for the output gap—the difference between actual and potential GDP—each time it releases its Monetary Policy Report. These estimates play a key role in the Bank’s decisions, but they are also based on data that are subject to revision—and revisions to output gap estimates can be very large. What may seem like a sensible policy stance given the data that are currently available can turn out to be a mistake when those numbers are revised.

Turns out this is exactly what happened when Statistics Canada released its national estimates for the first quarter of the year: a significant revision of the previous year’s numbers induced a revision of the Bank’s estimates for the output gap. The revision also has implications for the already-surging loonie, which will presumably head even higher with a raise in interest rates. Gordon cautions that these numbers, like the numbers before, could be revised in the future to make an interest rate increase less likely. But he also notes that Bank of Canada governor Mark Carney is likely to make a decision before the next revision happens. Toronto home buyers and sellers, consider yourselves warned.

• Here’s why Carney is going to raise rates [Globe and Mail Economy Lab]