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Capital Economics says the Bank of Canada’s growing hawkish tone on inflation could cause home sales to fall.
Date Posted:
June 7, 2022 • 8 hours ago • 3 minutes reading • 12 comments A poster sold in front of a house in Calgary. Photo by Azin Ghaffari / Postmedia
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According to a report by a Capital Economics economist, Canada could be at risk of a real estate market-induced recession that will correct quickly if the Bank of Canada gets too aggressive with rate hikes.
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In an update on Tuesday, Canada’s senior economist Stephen Brown noted that the central bank did not seem uncomfortable with a double-digit drop in home sales in May, the second consecutive monthly drop, and that it was adopting a tone each more hawk on inflation.
“This raises the possibility of the bank promulgating a higher interest rate hike at its July meeting and worries that it will take a more aggressive approach to tightening policies than is ultimately required. housing prices are much lower and risking a major recession. “He said.
Domestic home sales fell 12% month-on-month in May, after falling 14% in April. Although Brown suggested that the falls would bring sales closer to the pre-pandemic norm, the balance of supply and demand gave him more cause for concern.
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In addition, the company’s data found that the fall in the ratio of sales to new listings in major markets such as Toronto, Montreal, Vancouver and Calgary means that house price inflation could fall by 18% in April to zero at the end of the year.
Housing prices are already falling, according to data from Capital Economics, falling 0.6 percent month on month across the country. Toronto saw its prices fall even faster by more than three percent for the second month in a row in May.
Brown noted that Canada’s housing sector took up little space in the bank’s policy statement accompanying its decision to raise interest rates by 50 basis points on June 1, and said only that “housing market activity is moderating from exceptionally high levels.”
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The bank will deliver its 2022 financial system review on June 9, where it could go into more detail about moderating the real estate market.
As inflation peaks for several decades (the Canadian price index rose 6.8 per cent in April), the bank has indicated it is willing to deal with rising consumer prices. with stronger type climbs. Bank of Canada Governor Tiff Macklem suggested in April that the central bank could temporarily move the one-day rate above the neutral range of two to three per cent, which would not help or hinder economic growth.
Deputy Governor Paul Beaudry echoed that sentiment in a June 2 speech a day after the latest policy rate decision, saying the bank should raise its benchmark interest rate at least at three percent to control inflation.
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Content of the article
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The World Bank reduces global forecasts by almost a third and warns that many countries are now facing a recession
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“Better be prepared” Corporate America is sounding the alarm on the economy
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Toronto home prices are falling for the third month in a row as interest rates rise
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Bank of Canada’s Paul Beaudry suggests benchmark rate above 3%
However, Brown argued that the danger is that the bank will misjudge the impact of the aggressive tightening of its policy and potentially send home sales down.
“If the bank raised its policy rate to 3.5 percent … then the housing market would face the most dramatic impact of accessibility since the early 1980s Volcker Shock.” said Brown, referring to the period in which Federal Reserve Chairman Paul Volcker aggressively raised rates.
Brown added that according to his company’s estimates, a 3.5 percent policy rate would increase the average five-year fixed-rate mortgage rate to 4.5 percent and the average variable rate to 4 percent. 9 percent. Despite accelerating wage growth this year, Capital Economics estimates that these mortgage rates would reduce the maximum home price that buyers can afford by 23 percent, which Brown estimates will have a four-fold greater impact. than the previous three hardening cycles.
• Email: shughes@postmedia.com | Twitter: StephHughes95
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