Bank of Canada Holding Interest Rates as Concerns Over Housing Affordability Continue
The Bank of Canada announced Wednesday it’s holding interest rates at 1.75%, while informing Canadians that attention will be on “developments in consumer spending, the housing market, and business investment” in 2020.
Canada continues to have the highest policy rate among advanced economies, but there also “remains a high degree of uncertainty and geopolitical tensions have re-emerged, with tragic consequences,” the Bank says. Indicators since October’s Monetary Policy Report (MPR) have been “mixed.”
Data suggests that immediate growth will be weaker with the output gap wider than initial projections made back in October. The slowdown in growth, the Bank notes, could be because of consumer reluctance to spend and the increasing desire to save income. And this stalling could also be related to factors including strikes, poor weather, and inventory adjustments.
The Bank projects the global economy will grow by a little over 3% in 2020, and for Canada, the Bank forecasts “real GDP will grow by 1.6% this year and 2% in 2021.” This follows a 1.6% growth seen in 2019.
Exports fell in late 2019, and business investment showed weaker performance in the fourth quarter of 2019. A surge in exports or business investment is not immediately likely, rather they will “contribute modestly” to growth. Yet, the Bank also says residential investment was “robust through most of 2019, moderating to a still-solid pace” during the final quarter of the year.
The Bank projects household spending will be reinvigorated, in part, thanks to the recent federal income tax cut. Measures of inflation remain around 2% for an economy that “until recently, has been operating close to capacity.”
They suggest the slowdown could be temporary and that Canadians should also expect some fluctuations in 2020 because of the volatility with energy prices.
A Closer Look
Many economists believed the policy rate would remain unchanged while some voiced the need for a cut (albeit not this year), but one area where a real negative outlook exists among economists is housing affordability, this according to 13 economists cited in Finder’s 2020 BoC Interest Rate Forecast Report.
Sebastien Lavoie, chief economist at Laurentian Bank Securities said a policy rate was unlikely and also voiced his concern about the risk of returning to “frothy housing conditions” and that the number of Canadians “owning a home will increase, but not the percentage of households owning a home.”
“The year-over-year pace of growth in mortgage credit outstanding is on the verge of becoming the fastest since the B20 stress test on uninsured mortgages was implemented in January 2018,” explains Lavoie.
He also said it is like it is: “Too many millennials are either unable to buy or simply prefer to rent for longer.”
“Population growth, low mortgage rates and limited near term supply will likely support price growth in most major markets,” said Carl Gomez, senior vice president of research and strategy at QuadReal Property. “Mid-level markets (and Alberta) are likely to see less demand pressure.”
Considering wage growth, employment, cost of living, household debt, and housing affordability, panellists predicted wage growth to be the most positive, in stark contrast to housing affordability.
Finder’s previous report saw that 50% of the panellists were negative on housing affordability, but this time around sentiment has changed to 100% negative.
Some of the economists also noted that markets which depend on oil or autos will see a decline.
“Although the oil and auto sectors are contracting, this will only offset the price increases of the housing bubble in a few places,” says Lars Osberg, professor of economics at Dalhousie University.
A Look Ahead
The panel’s six-month outlook for 15 housing markets, including Toronto, suggests that prices are to increase in 10 markets, drop in two markets, and experience no change in three markets, according to Finder’s roundup.
The panel thinks it is unlikely that Canada will go into a recession in the next 12 months, with 54% of the surveyed economists saying it is “somewhat unlikely,” 31% saying it is “very unlikely,” and 15% believed it is “somewhat likely.”
“There is an upbeat perception in Ontario and Quebec regarding the house prices,” says Murshed Chowdry, associate professor at the University of New Brunswick. “In some cases, such an upbeat is coming from supply shortage and spillover from Toronto.”
June looks to be when a rate cut is most likely, but as noted by Finder’s results, this might not happen this year at all.
The next date for the announcement of the overnight rate target is slated for March 4, 2020. The full update on the Bank’s outlook will be published on the MPR on April 15, 2020.