Doug Porter on what we should expect from the Bank of Canada

According to BMO Financial Group chief economist Doug Porter, the national real estate market remains hot, and a further cooling would be appropriate until it transforms into a sharp and significant slowdown.

Porter says the recent market slowing should be viewed through the prism of the unprecedented homebuying activity seen at the start of 2021, and today’s activity still exceeds its pre-pandemic level.

“Yes, the market has cooled off from the madness we’ve faced earlier this year, but the main word here is ‘madness,’” – he noted. “The numbers we’ve seen in February and March were beyond normal.

“Even with the recent so-called cooldown, home sales remain at the level that we haven’t seen before the pandemic. Canada’s real estate market is still hot and tight, and the prices will keep growing unless something changes.”

Although most attention is focused on Canada’s biggest markets, Porter said the surrounding cities (e.g. London and Windsor in Ontario) have reported really worrying price gains lately.

According to the Windsor-Essex County Association of Realtors, the average home price in the region has grown by almost 32% during the past year. Meanwhile, the Canadian Real Estate Association (CREA) says the average price in London saw an annual increase by 27%.

Amid such results, Porter repeated that further support of the already extremely strong demand would be unreasonable for the federal government, even if we talk about helping first-time potential buyers.

“In my opinion, further demand support will not help, even if it concerns first-time buyers,” – he said. “The deal is that any support for demand will cause another prices hike and be counterproductive.”

The right solution for cooling Canada’s real estate market, according to Porter, is raising interest rates, and the central bank plans to start the tightening cycle by mid-2022.

Some believe that the Bank of Canada may start raising rates even sooner – in the beginning of 2022, with financial markets predicting the first hike in January.

Porter doesn’t rule out this possibility entirely, but considers it still unlikely. However, he says the possibility of rate hikes by more than 0.25% per increase also couldn’t be discounted.

“I don’t think the BoC will act that quickly – I can’t rule it out, but everything points to the first possible rate increase in April,” – he explained. “I can’t say there’s a reason to start moving faster than a quarter percent per calendar quarter, which is what we’ve been predicting.

Nevertheless, the central bank has already moved more quickly than that in the past. And if we face a really serious inflation issue, there’s nothing that could stop the Bank.”

At the same time, Porter believes such a scenario is more of an “outside risk”, with the Bank probably focusing on quarter-percent increases per calendar quarter. “I still think the BoC doesn’t want to shock anyone”, – he added.