Canada risks a housing recession due to aggressive interest rates

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Bank of Canada’s growing inflation tone could potentially boost home sales, says Capital Economics

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June 7, 2022 • 8 hours ago • 3 minutes reading • 12 comments Sign sold in front of a house in Calgary. Photo by Azin Ghaffari / Postmedia

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Canada could be at risk of a recession caused by a rapidly adjusting housing market if the Bank of Canada becomes too aggressive in raising interest rates, according to a report by an economist at Capital Economics.

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In an update Tuesday, senior Canadian economist Stephen Brown said the central bank seemed unperturbed by the double-digit decline in home sales in May – the second consecutive monthly decline – and was adopting an increasingly hawkish tone on inflation.

This raises the bank’s chance to raise interest rates at its July meeting and worries us that it will take a more aggressive approach to tightening policy than is ultimately required by drastically lowering house prices. and risks a major recession, “he said.

Home sales in the country fell 12% on a monthly basis in May, after falling 14% in April. While Brown suggested that the decline would bring sales closer to normal before the pandemic, balancing supply and demand gave more cause for concern.

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In addition, the company found that declining sales to new ads in major markets such as Toronto, Montreal, Vancouver and Calgary suggest that house price inflation could fall from 18% in April to zero by the end of the year.

House prices are already falling, according to Capital Economics, down 0.6% a month across the country. In Toronto, prices fell even faster by more than 3% for the second month in a row in May.

Brown noted that Canada’s housing sector has little place in the bank’s policy statement accompanying its decision to raise interest rates by 50 basis points on June 1, saying only that “housing market activity is slowing from extremely high levels.” .

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The bank will present its review of the financial system for 2022 on June 9, where it can go into more detail about the moderate housing market.

With inflation at its highest level in decades – Canada’s price index rose 6.8 percent in April – the bank said it was ready to step up with rising consumer prices with higher interest rates. Bank of Canada Governor Typh McLeham suggested in April that the central bank could temporarily move the overnight interest rate above the neutral range of two to three percent, which would neither help nor hinder economic growth.

Deputy Governor Paul Baudry reiterated this opinion in a speech on June 2, the day after the last decision on political interest rates, saying that the bank will have to raise its base interest rate to at least three percent to curb inflation.

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1. World Bank cuts global forecasts by almost a third, warns many countries now face recession

2. Better prepare: Corporate America is sounding the alarm for the economy

3. Toronto housing prices fall for third month in a row as interest rates rise

4. Bank of Canada’s Paul Bodri suggests interest rates could exceed 3%

However, Brown argues that the danger is that the bank will misjudge the impact of its aggressive policy tightening and could potentially lead to a halt in home sales.

“If the bank raises its interest rate to 3.5%… then the housing market will face the most dramatic blow to affordability since the early 1980s, Walker,” Brown said, referring to the period when the Federal President reserve Paul Walker was aggressively raising interest rates.

Brown added that his firm estimates that an interest rate of 3.5% will bring the average five-year fixed interest rate to 4.5% and the average variable interest rate to 4.9%. Despite accelerating wage growth this year, Capital Economics estimates that these mortgage interest rates will reduce the maximum price of housing that home buyers can afford by 23%, which Brown says will have four times the impact of the previous three tightening cycle.

• Email: shughes@postmedia.com | Twitter: StephHughes95

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