The Bank of Canada has instituted a second "conditional pause" at a 5% interest rate, following ten consecutive hikes. The decision was discussed by finance expert Rubina Ahmed-Haq and interviewer Antony Robart, with the central bank citing less severe home price drops than anticipated due to a structural shortage of housing supply. This viewpoint is shared by Stephen Brown from Capital Economics and other economists who predict further market declines.
According to Canadian Real Estate Association data, home prices dropped 18% from March 2022 to January 2023, before rebounding 8% in the spring and peaking again in June. The Bank of Canada attributes this unusual pattern to a structural lack of housing supply. In response, the Canada Mortgage and Housing Corp. has suggested adding about 3.5 million housing units by 2030 to restore affordability.
Carolyn Rogers (NYSE:ROG), senior deputy governor at the Bank of Canada, highlighted the surprising resilience of the housing market compared to historical trends. Rachel Battaglia from RBC noted that limited supply has maintained home prices despite higher ownership costs due to rising interest rates. She observed that while Ontario and British Columbia have taken a harder hit, Alberta's market, especially Calgary, continues to grow due to low debt-to-household income levels and the strength of the commodity-rich Western economy.
A report from Royal LePage emphasized homeowner anxiety about higher-rate mortgage renewals. Fixed mortgage rates tied to bond yields remain high, with TD Bank economist Rishi Sondhi predicting a 5% drop in average prices and a 10% sales activity drop by Q1 2024. RBC also projects unemployment rising to 6.5% within a year, which could affect the housing market.
However, record immigration levels are expected to boost employment growth. The mortgage stress test guards against potential borrowing cost increases. Auto loan delinquency rates exceed pre-pandemic levels, indicating potential economic challenges ahead. The Bank of Canada's financial system review will detail households' situation amid higher rates, with Governor Tiff Macklem noting a "narrower" path to economic stability.
Battaglia, along with other economists, expects home prices to continue to fall as higher interest rates affect homeowners. This comes as the Bank of Canada reports less steep home price drops than expected due to structural supply shortages despite interest rate hikes.
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