Bank of Canada sees less risk of housing market overheating as demand softens

  8/7/2024 |   SHARE
Posted in Canadian Economy and Housing Market by Vanguard Realty | Back to Main Blog Page

The Bank of Canada (BoC) now perceives a reduced risk of the housing market overheating, citing ongoing affordability challenges as a significant factor in cooling demand.

In its latest summary of deliberations from the July 24 interest rate announcement, the Bank highlighted how elevated borrowing costs are tempering housing demand, while still acknowledging ongoing affordability challenges and supply constraints.

While declining mortgage rates and higher-than-expected population growth “could add to demand,” Governing Council members expressed that this seems less of a concern than previously thought.

“Concerns had decreased that pent-up demand would lead to a sudden rise in house prices with cuts in the policy interest rate,” the summary reads. “Housing affordability challenges could have played a greater-than-expected role in dampening demand.”

They added that affordability challenges could now cause more people to remain in the rental market, putting upward pressure on rent prices, which have been easing in recent months.

BoC aiming to balance inflation and GDP

The central theme of the discussions centred on balancing the need to manage inflation while also supporting economic growth.

Here’s what Governing Council members discussed on the topics of inflation, GDP and the country’s labour market:

Inflation

Latest data (June): Headline: +2.7%; CPI-Median: 2.6% (from 2.7%); CPI-trim: 2.9% (no change)

Governing Council discussed positive developments on the inflation front, with headline CPI remaining within the 1% to 3% neutral range since January, while the Bank’s preferred measures of core inflation have “eased meaningfully” since April.

“Members noted that inflation had become less broad-based across goods and services—the share of components growing above 3% was close to its historical average,” the summary noted. “Overall, members expected core inflation to ease gradually to about 2.5% in the second half of this year and then ease further in 2025.”

GDP growth

Latest data (May): +0.2% (above estimates of +0.01%); flash estimate for June is +0.1%

While slowing, economic growth has remained positive but subdued in the second quarter, “driven largely by population growth,” the Bank noted. On a per-capita basis, however, the BoC acknowledged that GDP “appeared to have contracted.”

The Council expects growth to pick up again in the second half of the year to a rate of 2.25% over the next two years. “This forecast is largely driven by renewed strength in residential investment and consumption, as well as a boost in exports,” the summary read.

The BoC also drew attention to “volatile” wage growth readings that are sending “mixed signals.” Overall, however, wage growth remains elevated at around 4%, well above productivity growth, the Bank said.

Employment

Latest data (June): +1,400 jobs (+1,900 part-time and -3,400 full-time); unemployment rate of 6.4% (from 6.2%)

BoC Governing Council members were in agreement that slack in the labour market is expected to continue to persist as labour force growth outpaces employment growth in the near term.

The council referenced the latest results from the Canadian Survey of Consumer Expectations, which revealed that consumers are increasingly pessimistic about job prospects and more are concerned about potential job losses.

At the same time, The Bank’s Business Outlook Survey revealed the number of firms citing labour shortages is now near survey lows.

Bank expects to continue lowering interest rates

Everything considered, there was a consensus among the Bank’s Governing Council that they will be able to continue lowering interest rates “if inflation continued to ease in line with the projection.”

“The countervailing forces pushing inflation down and pulling it up meant that progress could be bumpy, and there could be setbacks in progress toward the target,” the summary notes.

Members shared various perspectives on how these factors could evolve over time and what they might mean for the timing of future policy interest rate cuts.

“Given these uncertainties, they agreed there was no predetermined path for the policy rate,” the summary continued. “They would take decisions one meeting at a time.”

Source: Canadian Mortgage Trends

Bank of Canada, Canada Real Estate, Canadian Housing Market Slowdown