State of the Canadian Housing Market, July Recap

Québec City, QC | mkdrone_

Written by Breck Hapner

In July, multiple actions and interpretations regarding interest rates may positively affect the Canadian housing market in the coming months. The Federal Reserve has revoked the possibility of a U.S. recession, as economists no longer predict an impending economic decline, citing greater-than-expected growth in the economy.

Subsequently, the Bank of Canada (BOC) proceeded to release their minute notes from July, but nearly omitted mentioning the potential increase in interest rates. The BOC then released their Market Participant Survey, featuring data that indicates the direction respondents believe Canada’s interest rates will take.

Also, the majority of economists are now predicting that the BOC is finished increasing interest rates altogether. So, how did all this happen, and what are the important facts to consider?

Montreal, QC | Grant Van Cleemput

According to a July 26th Bloomberg report, “Federal Reserve Chair Jerome Powell said the U.S. central bank’s staff economists are no longer forecasting a recession given recent resilience in the economic data.”

This suggests that ongoing durability in the U.S. economy is indicating no likelihood of a recession, and the “soft landing” that central bankers crave may become a reality in the U.S. 

However, this change in forecast wreaked havoc on the bond market, causing interest rates to fluctuate wildly. Some lenders have increased interest rates across the board on uninsured mortgages, which is something not previously seen. This may mean certain banks and investors are reducing the number of mortgages they fund.

Newfoundland, NL | Erik Mclean

In addition to the change in language from the U.S. Fed, indicating there may not be any further interest rate increases (although the Fed did not totally discount a future possibility), the BOC released their deliberations regarding delaying a rate hike. According to a July 26th Reuters article, it turns out inflation was the BOC’s main concern.

It’s noteworthy that the BOC’s decision to increase interest rates was driven by a crucial factor: the consensus was that the drawbacks of delaying action outweighed the benefits of waiting. In other words, the BOC incorrectly viewed increasing interest rates as a better alternative to doing nothing and being wrong. This goes back to their desire to make sure inflation is completely under control, no matter what the cost.

That being said, the BOC also released their Market Participant Survey of 30 big business economists. This survey provides the BOC insights into the prevailing market sentiment regarding interest rates. According to a July 25th Toronto Star report, the BOC will hold their interest rate at five percent until the end of the year due to survey response.

Winnipeg, MB | Brydon McCluskey

Click on the Market Participant Survey “Monetary Policy” tab to see the forecast. What is interesting in this report is the fact that most market participants see the already-attained five percent as the upper limit for rates until the end of the year.

Now, there may be some outliers that said they thought interest rates were going to drop, and there could have been some participants who said they thought interest rates would rise, but the large majority noted that the interest rate would not exceed five percent.

Examining later Q3 and Q4, there also seems to be a consensus that by the end of next year, interest rates are going to be significantly lower than they are right now.

The underlying questions are another key piece to the BOC Market Participant Survey data. For example, “How would you describe the balance of risks around your forecast for the BOC policy interest rate? Do you think it would be skewed to a higher path, a lower path, or other risks broadly balanced?” It is important to note that 57.7 percent of respondents said their forecast is skewed to a higher path.

Mont Tremblant, QC | William Moses

The next question is: “At what level do you expect the policy rate to peak in the current cycle in Canada?” Nearly all respondents stated five percent, which is exactly where Canada’s interest rate is now.

And when asked, “What is your estimate of the long-term nominal neutral rate in Canada?” everyone said about 2.5 to three percent. This means in the long term (all else being equal), interest rates should start to come down at some point, albeit not in the near future.

All this leads to a really insightful July 28th article from The New Yorker that asked the question, “Why did economic forecasters get their recession call wrong?”

Hawkesbury, ON | Damian Wyroslak

Not only has the U.S. economy outperformed predictions, but it’s growing at a faster rate than experts think is sustainable in the long run. The gist of this article is that forecasters tend to get their predictions wrong because economies are incredibly complex. The biggest issue with respect to forecasting the U.S. and Canadian economy is the fact that the Biden and the Trudeau administrations’ COVID relief measures were significantly more successful and sustainable than many thought possible.

It now seems the U.S. and Canada will emerge from the pandemic situation with its aftermath in a much more positive place, enhancing economic recovery in time, manpower, and materials. Of course, this return from the COVID abyss will eventually strengthen the struggling housing markets.

That being said, in the last paragraph of the New Yorker article, the author writes, “As a worrywart, I can always find things. The Fed could still tank the economy by keeping rates too high for too long. The renewed bubble in technology stocks, driven by optimism about A.I., could end in a stock-market crash. There could be another banking crisis, or something out of the blue, such as a conflict in the Middle East that creates another run-up in energy prices. I can also point to the sight of economic forecasters getting more optimistic, but that would be mean. For now, let’s just celebrate the fact that their predictions turned out to be wrong.”

Nanaimo, BC | Karthick Krishnakumar

In our August recap, Haven will take a further look at the numbers: how the Canadian housing market is reacting to prevailing economic factors influencing real estate.