U.S. Federal Reserve and nervous bankers could put the brakes on Vancouver housing market

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      One of the wildcards in the Vancouver housing market is the U.S. Federal Reserve. If it raises the federal funds rate south of the border, this will pressure the Bank of Canada to increase interest rates in our country.

      Keep in mind that the U.S. Federal Reserve will likely want to hold the line on raising interest rates until after the November presidential election.

      That will keep the U.S. economy humming forward, which would help Democratic presidential candidate Hillary Clinton stave off a challenge from Donald Trump.

      This might explain why the U.S. Federal Reserve maintained the federal funds rate at existing levels this week.

      This occurred even as the American labour market has strengthened and economic activity is expanding. The Federal Reserve's board of directors and its bank presidents won't want to help Trump by slowing the economy before voting day. 

      If Clinton wins the election, the U.S. Federal Reserve could then lift interest rates in response to a growing economy and to stave off inflationary pressures.

      If the Bank of Canada doesn't follow suit, the Canadian dollar would likely go into a freefall. This is even more likely if oil prices remain flat.

      Whenever the loonie trades below US$0.70, food prices go up and confidence goes down in the government's handling of the economy. The solution? Higher interest rates in Canada to protect the dollar. And this could clobber those homeowners who can barely meet mortgage payments at today's rock-bottom rates.

      Will lenders get cold feet?

      Another factor influencing the housing market is the willingness of financial institutions to underwrite mortgages. Whenever there are wobbly conditions, lenders get cold feet and mortgage applications aren't approved. This leaves fewer buyers to bid on properties.

      At the moment, there's still a shortage of housing to meet demand, with only about two months of inventory in the Vancouver housing market.

      A recent Housing Analysis blog post suggested that even if MOI reached five months, that would only result in a "soft landing".

      However, if bankers stop lending, foreign buying diminishes, and interest-rate increases leave homeowners with larger mortgages than the value of their homes, all bets are off.

      The crazy days of the Vancouver housing market, where one seller might be presented with two dozen offers, could be coming to an end. Particularly after November.

      If conditions reach the point where there's a full-blown housing crash, expect a great deal of dissension to erupt within the B.C. Liberal party.

      This will make it even more difficult for Premier Christy Clark as she gets ready to launch her campaign in advance of the May 2017 provincial election.