BMO Economics: Canada’s real estate market “caught in crossfire” because of Russia-Ukraine war

If you want to know how the Russian aggression against Ukraine may influence to Canada’s real estate market, BMO Economics has an answer for you.

Sal Guatieri, a senior economist and director at BMO Capital Markets, released an analysis called “Canadian Housing: Caught in the Crossfire”.

To put it shortly, the war is not good for our housing market (what a surprise).

“With today’s situation, the war is expected to raise more worries over inflation than growth, increasing risks to the rate outlook,” – Guatieri says.

In other words, if there was any possibility that the central bank will slow down its expected 2022-2023 rate-increases cycle, now this chance has probably vanished.

“The Bank of Canada doesn’t consider the war to be an obstacle to its tightening cycle, as it already started acting this week, and it plans to keep the path to the normalization for the year,” – Guatieri noted.

The economist pointed to the March 2 announcement by the BoC of a 0.25% rate hike to 0.5%.

In Guatieri’s opinion, the national real estate market is already hot enough.

“It’s really difficult to imagine the housing market becoming even hotter than it is now,” – the economist says.

He added that “in January, benchmark prices showed record increases since 2005 – both annually and monthly, and prices kept rising in February”.

In case of the Greater Vancouver market, the benchmark composite price was up to $1,313,400 last month, marking an annual gain by 20.7% and a monthly hike by 4.6%.

Last month, the benchmark composite price in Greater Vancouver reached $1,255,200 – it’s 18.5% more than a year earlier and 2% more than in December 2021.

According to Guatieri, February’s increase in Greater Vancouver is “pedestrian compared with Toronto”.

Last month, Toronto showed an annual prices gain by as much as 35.9%.

“To see it in perspective, in a balanced market, home prices tend to grow approximately alongside family income, which rarely shows a 4.5% increase in an entire year let alone a single month,” – Guatieri explained.

As you know, on February 24, Russian President Vladimir Putin invaded Ukraine, calling it a “special military operation”.

Although growing interest rates may slow down the large markets of Greater Vancouver and Toronto, the BMO economist believes certain regional markets may “come out ahead even amid growing rate conditions.”

As the interest rates are going up amid the Russia-Ukraine war, Guatieri said that Canada’s real estate market now faces its strongest challenge in recent years.

“Investors, which represent the fastest growing category of buyers, will be the first to back off,” the economist noted.

The central bank’s next rate meeting is scheduled for April 13, 2022.

According to Guatieri, although the BoC’s Governor Tiff Macklem said the “uncertainty caused by the war guarantees a ‘careful’ approach, any caution will be used only in case the inflation exceeds the three-decade highs”.

“By further intensifying global supply chains and pushing many commodity prices to multi-year record levels (oil and wheat reached 13-year peaks and aluminum – an all-time highs), the war is an unwelcome factor in terms of the inflation issue,” – the economist says.

However, Guatieri also provided a second scenario for the war in Europe and its influence on Canada.

“In case the conflict escalates, reduces confidence significantly and harms financial conditions, the hit to the economy may exceed worries over inflation, leading to a slower tightening cycle,” – Guatieri concluded.