National Bank made a cautiously optimistic forecast on interest rates cuts and housing market rebound later this year

This week, National Bank released its new Outlook 2023: How Bad Will it Be? Although the title is obviously grim, economists still believe we’ll have a soft landing by the middle of 2023. Interest rate is expected to remain at 4.50% during the first half of this year, followed by a small decline by the end of the year.

As you know, the central bank raised its key lending rate by 0.25% last month, but also stated it plans to pause its rate hiking cycle. “If our forecasts on inflation are right, the Bank of Canada will have to start reducing the rate in the second half of 2023,” – noted the National Bank of Canada’s Chief Economist and Strategist Stéfane Marion. “It will not be a big cut, probably by 0.50% only, but it will reduce the payment shock people are facing when renewing mortgages.” According to Marion, such a scenario depends on numerous factors: from the war in Ukraine to U.S. labour market trends to China’s policy on COVID.

Real estate prices are also expected to return to their previous trends gradually. The National Bank says Canadians will hardly face the same challenges as the U.S. housing market during the 2008 recession, although home prices will probably keep going down in the nearest future. The bank expects another 5-6% drop this year (in addition to a 10% decline since last year’s peak), but it could be softened by a planned immigration spike.

In 2022, Canada’s population showed an incredible growth of 850,000. Most of those people are relatively young and educated immigrants, entering the national economy with a historically low unemployment rate. The federal government plans to raise annual immigration by almost half a million during the next 3 years.

“In case we have strong population growth, with employed people, it will lead to household formation, which will reduce the home prices decrease,” – explained Marion. He says the immigration boom combined with a cautiously optimistic economic forecast and possible rate cuts may reverse the tendency of decreasing housing prices before the end of 2023.

This gives hope for Canadians worrying about more drops in their home values and more hikes to their mortgage rates. While it’s not guaranteed, National Bank is quite optimistic that the worst is almost over, with interest rates and home prices changing their vectors this year.