Well, the grim news keeps coming on the economy front -- especially for first-time homebuyers.
The top economists in the country -- and around the world -- seem to have an unanimous opinion: things are going to get worse in the global economy and many housing markets before they will get better. The culprit is perpetually climbing interest rates enforced to combat high inflation. The higher they climb -- and they are expected to continue to increase yet again -- the worse the outlook is.
And, while we hate to be the bearers of bad news, the recent doom and gloom reports are pretty impossible to ignore.
Most recently, Capital Economics announced it had revised its forecast to account for heightened interest rates for major developed global markets by 50 to 100 basis points. The London-based economics research firm now expects rates to peak at between 3% and 5%. These higher rates will put pressure on Canada’s already strained housing market, resulting in bigger price drops. According to Capital Economics, Canada could see a high to low drop of about 20% -- the most notable among advanced economies, aside from New Zealand.
Row of modern townhouses in Vancouver, Canada
The International Monetary Fund (IMF) also made headlines this morning for stating that “the worst is yet to come” in the global economy, given sky-high inflation and the subsequent interest rate situation. In their biannual World Economic Outlook, the IMF stressed that the world's largest economies -- the United States, European Union, and China -- will continue to remain stagnant.
“The worst is yet to come, and for many people 2023 will feel like a recession,” the lender’s chief economist, Pierre-Olivier Gourinchas, writes of the economy in the report’s foreword. “As storm clouds gather, policymakers need to keep a steady hand.”
While the IMF maintained its forecast of 3.2% global growth for 2022, it cut its projection for 2023 to 2.7% -- a figure that would represent the weakest growth since 2001, with the exception of the height of the global financial crisis and the early days of the pandemic. The IMF also warned of a 25% chance that global growth will fall below 2% in 2023. Still, the IMF continues to encourage the world's central banks to enforce measures to tame inflation (i.e. interest rate hikes).
The heads of central banks seem to share the same sentiment. Last week, Bank of Canada Governor Tiff Macklem stressed that the bank needed to continue to raise interest rates to tame down the economy and get inflation -- something that's taking a major toll on household finances of Canadians -- under control.
And global housing markets will undoubtedly feel the crunch. TD economists now predict that home sales will bottom out 20% below pre-pandemic levels by early 2023 and remain less dramatic for the remainder of the year.
This week’s doom and gloom news also comes after RBC's deputy chief economist Robert Hogue highlighted in a report how buyers were on the defensive and “in an exceptionally tight squeeze” and “facing the worst affordability conditions ever in large parts of the country.” A climate of climbing interest rates is depressing the values of single-detached homes first and foremost. In the face of looming interest rate hikes, Hogue too says that “the bottom is still some ways away.”