Capital Economics thinks future rate increases may “topple” Canada’s real estate market
A recent report by Capital Economics says the expected cycle of interest rate hikes from the central bank may “topple” the national real estate market.
According to Capital Economics Senior Canada Economist Stephen Brown, the 2.5% rate markets are now forecasting for the next year would probably not only stop housing prices growth, but could even push it in a different direction.
“Can the real estate market withstand a return to pre-pandemic mortgage rates, while home prices have grown by more than 50%? Definitely, no,” – he said.
“As today’s house prices are extremely elevated, there’s a risk that an initial decrease could lead to a downward spiral of lower real estate prices and lower house price expectations.”
Even with Capital Economics’ less hawkish forecast of a 2% benchmark rate, Brown expects home price inflation to stop in 2023.
Such a warning comes amid a long period of sky-rocketing home prices not only in Canada’s largest cities, but in secondary communities as well, as remotely working Canadians were able to move further from the cities during the pandemic and afford larger properties. Historically low interest rates also supported the price gains, as buyers were able to increase their budgets.
According to the Teranet-National Bank House Price Index, the prices rose by 17.7% annually last month.
Although the Bank of Canada considers excessive household debt levels (caused partially by mortgage debts) to be a potential threat to the domestic economy, Brown says the central bank may not mind some moderation in home prices while it follows its path of monetary tightening.
“We shouldn’t assume that the BoC will be avoiding house price drops at any cost,” – he noted. “Real estate prices are the main driver of shelter inflation, so moderate decreases could help to get consumer price inflation under control without seriously hurting the national economy.”
As we always warned – you should take all forecasts with the grain of salt! For example, Capital Economics were bearish on housing for many years and during those years prices on Canadian real estate are almost tripled…