Anticipated rate hikes could 'topple' housing market: Capital Economics
BNN Bloomberg
A new report from Capital Economics is warning the expected magnitude of interest rate increases from the Bank of Canada could “topple” the domestic housing market.
A new report from Capital Economics is warning the expected magnitude of interest rate increases from the Bank of Canada could “topple” the domestic housing market.
In a note to clients, Capital Economics Senior Canada Economist Stephen Brown said the 2.5 per cent benchmark rate markets are now pricing in for 2023 would likely not only slam the brakes on home price appreciation, but could put it in reverse.
“Can the housing market withstand a return to pre-pandemic mortgage rates, even though prices have risen by more than 50 per cent in the interim? The answer is a firm ‘no’,” he said.
“With house prices now so elevated versus traditional valuation metrics, the risk is that an initial decline could trigger a downward spiral of lower house prices and lower house price expectations.”
Even with Capital Economics’ more modest view of the benchmark rate topping out at two per cent, Brown said he expects home price inflation to stall next year.
The warning comes on the heels of a prolonged run-up in home prices not only in the nation’s largest urban centres, but in secondary communities as pandemic-weary workers were able to move further afield in search of more space during the work-from-home era. Rock-bottom rates also contributed to the price increases, as buyers were able to stretch their budgets to get into a home of their own.
Manufacturing sales fell 2.1 per cent to $69.9 billion in March as sales of petroleum and coal products and motor vehicles fell, Statistics Canada said Wednesday. Olivia Cross, North America economist at Capital Economics, said the result was not as bad as the early estimate that pointed to a drop of 2.8 per cent, but it still means sales fell 0.9 per cent over the first quarter. "The weakness of manufacturing sales in March suggests that the economy lost momentum heading into the second quarter, matching the message from the earlier preliminary estimates for retail sales and GDP," Cross said in a note. Last month, Statistics Canada released a pair of preliminary estimates for real gross domestic product and retail sales for March that both suggested the data points were essentially unchanged for the month. Driving the manufacturing sales numbers for March was an 8.0 per cent drop in sales of petroleum and coal products to $8.0 billion as volumes fell 6.1 per cent. Sales of motor vehicles fell 7.9 per cent to $4.6 billion in March as sales of motor vehicle parts lost 2.8 per cent. Statistics Canada says retoolings at several major auto assembly plants in Ontario continued to impact auto manufacturing and contributed to the lower sales for the month. Meanwhile, sales of machinery rose 2.9 per cent to $4.5 billion in March. The increase came as sales in all seven machinery industry groups climbed higher, led by commercial and service industry machinery which gained 41.6 per cent. Overall manufacturing sales in constant dollars fell 2.0 per cent in March. Total inventories for the month were largely unchanged at $121.0 billion in March, while unfilled orders fell 0.8 per cent to $104.8 billion. This report by The Canadian Press was first published May 15, 2024.