What Will Rising Home Costs and Inflation Do to Canadian Real Estate?

Prices of homes have been rising and inflation is predicted to continue to an all time high in the near future. With talks of possible economic recession in Canada and households drowning in shelter cost, what could this mean for the future of Canadian real estate?

Latest on Canadian Real Estate Market Trends by Steve Saretsky

Happy Monday Morning!

The Bank of Canada didn’t mince words this past week. The banks second in command, Carolyn Wilkins, suggested the uncomfortable predicament they have stumbled upon. “In the current context, lowering interest rates could provide some insurance against downside risks to inflation. However, this insurance would come at a cost in terms of higher household vulnerabilities down the road.”

Wilkins added, “Canada’s biggest domestic financial vulnerabilities are the high level of household indebtedness and imbalances in the housing market. We worry about these things because weaknesses in the financial system can make economic outcomes far worse if a downside risk comes to pass.”

Fortunately, or perhaps unfortunately, global central banks have eased financial conditions without the Bank of Canada having to lift a finger. The recent capitulation from many of the top central bankers has helped plunge bond yields, which in turn has trickled through into lower Canadian mortgage rates. This has boosted purchasing power, and threatens to stoke home price growth once again.

Per a recent research note from Capital Economics, their seasonal adjustment of the alternative MLS house price index shows that price momentum is building quickly, with monthly gains of 0.5% m/m in each of the past three months. If that pace is maintained, house price inflation will reach 6% by the second quarter of 2020. The sales-to-new listing ratio suggests that house price inflation could rise by far more than that.

Meanwhile, thanks to a new approach for estimating the rent component of the CPI, which aims to more accurately reflect the real world, the Bank of Canada’s October CPI data showed rent inflation surged to 3.7%, the highest rate of rent inflation since 1991.

Of course there are a number of obstacles which could derail a further acceleration in shelter costs, the most obvious arising from the heightened risk of the global economy slipping into a recession. However, until that materializes, shelter costs should continue to suffocate households.

Regardless, Bank of Canada Governor Poloz summarized his conclusions during an onstage interview at the Ontario Securities Commission in Toronto, “We think we’ve got monetary conditions about right given the situation.”

Three Things I’m Watching:

1. The Bank of Canada’s revised rent inflation gauge has rent inflation rising at 3.7%, the quickest pace since 1991.

2. Foreign purchasing activity in BC remains well below levels recorded several years ago.

3. Per Capital Economics, the sales to new listings ratio suggests the Teranet Home Price Index should accelerate higher.