In the spring, when the Bank of Canada started raising it prime rate, there were fears it would cause a complete collapse of Canadian housing markets..Seven months later, markets across the country have experienced declines in sales and prices, which was to be expected. .Housing markets were basically out of control because of historically low mortgage rates and something had to give, but it’s not a collapse, says economist Sherry Cooper. .“There are many unusual aspects to the current housing correction, but fundamentally the most noteworthy is how orderly and non-chaotic it has been,” Cooper said in a new analysis..“Home sales have slowed, but so have new listings, so the price declines are more muted than we might have expected.”.“This is not a housing collapse. It is a housing correction. We’ve seen little distressed selling, as most would-be sellers have lots of home equity and low mortgage rates (and are) not anxious to buy new properties immediately.”.Mounting costs in the rental market are also helping keep a crash at bay..“With rents surging, most potential down-sizers aren’t keen to make that trade-off,” Cooper said..The Bank of Canada makes its next policy announcement on Oct. 26, with the general consensus being the bank will hike the rate again. .What isn’t certain is the size of the hike..The rate is currently at 3.25%, with expectations the bank wants it to be 4% by year’s end. There is also a rate announcement on Dec. 7, so the bank could raise it .75% in October and another .25% in December..Or not..“We can’t rule out a 75-basis points hike,” says Cooper said. “I believe both the Bank of Canada and the US Fed will hike overnight rates further later this year and into next year. They are also not likely to begin to reverse these rate hikes until 2024.”.The bank’s battle to defeat inflation has led to increased talk of Canada going into a recession..The majority (78%) of a panel of economists and other experts organized by finder.com expect a recession, while 11% believe Canada is already in a recession, with 6% seeing it happen before the end of the year and 22% saying a recession will be confirmed in Q1 2023. .Cooper, a member of the panel, believes the only way to avert a recession in Canada would be to "let inflation remain high, but [the bank] won't do that.".Other panels members weigh in..Angelo Melino, a professor at University of Toronto said, "A recession in the US will spill over the border. Not much we can do to stop it. If inflation cools rapidly, we can at least try to mitigate the recession.".Carl Gomez, chief economist and head of market analytics at CoStar Canada, said he thinks it would almost take a miracle to avert a recession, saying "A confidence boost at this point is the only thing that is going to shift the momentum away from a downturn. That comes by seeing a sharper reduction in inflation, an end in sight to rate hikes, a productivity miracle or some combination of the above.”.Tony Stillo, director of economics for Canada at Oxford Economics suggests the bank should pause rate hikes.."Rather than further hiking the overnight rate and raising the likelihood of a hard landing, the Bank of Canada should pause and assess how the economy is responding to the current level of interest rates,” said Stillo. “The Canadian economy is much more interest rate sensitive than historically due to elevated household debt and overvalued housing.."While uncertainty is elevated and inflation risk is tilted to the upside, we don't expect higher inflation will become entrenched and lead to a wage-price spiral."
In the spring, when the Bank of Canada started raising it prime rate, there were fears it would cause a complete collapse of Canadian housing markets..Seven months later, markets across the country have experienced declines in sales and prices, which was to be expected. .Housing markets were basically out of control because of historically low mortgage rates and something had to give, but it’s not a collapse, says economist Sherry Cooper. .“There are many unusual aspects to the current housing correction, but fundamentally the most noteworthy is how orderly and non-chaotic it has been,” Cooper said in a new analysis..“Home sales have slowed, but so have new listings, so the price declines are more muted than we might have expected.”.“This is not a housing collapse. It is a housing correction. We’ve seen little distressed selling, as most would-be sellers have lots of home equity and low mortgage rates (and are) not anxious to buy new properties immediately.”.Mounting costs in the rental market are also helping keep a crash at bay..“With rents surging, most potential down-sizers aren’t keen to make that trade-off,” Cooper said..The Bank of Canada makes its next policy announcement on Oct. 26, with the general consensus being the bank will hike the rate again. .What isn’t certain is the size of the hike..The rate is currently at 3.25%, with expectations the bank wants it to be 4% by year’s end. There is also a rate announcement on Dec. 7, so the bank could raise it .75% in October and another .25% in December..Or not..“We can’t rule out a 75-basis points hike,” says Cooper said. “I believe both the Bank of Canada and the US Fed will hike overnight rates further later this year and into next year. They are also not likely to begin to reverse these rate hikes until 2024.”.The bank’s battle to defeat inflation has led to increased talk of Canada going into a recession..The majority (78%) of a panel of economists and other experts organized by finder.com expect a recession, while 11% believe Canada is already in a recession, with 6% seeing it happen before the end of the year and 22% saying a recession will be confirmed in Q1 2023. .Cooper, a member of the panel, believes the only way to avert a recession in Canada would be to "let inflation remain high, but [the bank] won't do that.".Other panels members weigh in..Angelo Melino, a professor at University of Toronto said, "A recession in the US will spill over the border. Not much we can do to stop it. If inflation cools rapidly, we can at least try to mitigate the recession.".Carl Gomez, chief economist and head of market analytics at CoStar Canada, said he thinks it would almost take a miracle to avert a recession, saying "A confidence boost at this point is the only thing that is going to shift the momentum away from a downturn. That comes by seeing a sharper reduction in inflation, an end in sight to rate hikes, a productivity miracle or some combination of the above.”.Tony Stillo, director of economics for Canada at Oxford Economics suggests the bank should pause rate hikes.."Rather than further hiking the overnight rate and raising the likelihood of a hard landing, the Bank of Canada should pause and assess how the economy is responding to the current level of interest rates,” said Stillo. “The Canadian economy is much more interest rate sensitive than historically due to elevated household debt and overvalued housing.."While uncertainty is elevated and inflation risk is tilted to the upside, we don't expect higher inflation will become entrenched and lead to a wage-price spiral."
