Canada’s central bank sees the economy getting a big boost from falling rates. The latest Bank of Canada (BoC) forecast shows real gross domestic product (GDP) rising sharply next year. Falling rates are expected to drive a big jump in housing investment, boosting real GDP. Not surprising, most of the real estate industry also expects the same. What is surprising is how dependent the BoC forecast depends on housing. To hit their forecast, housing will have to contribute GDP growth similar to the record demand sparked by the investor boom during the 2021 low-rate frenzy. The expectations are lofty, to say the least.
Canadian GDP Expected To See Growth Accelerate On Cheaper Credit
Canada’s economy is expected to get a big boost from monetary easing. The BoC’s latest forecast shows 1.2% annual growth for real GDP for this year, nearly a third of the global forecast. With the monetary easing and population slowdown, they see annual growth rising to 2.1% by next year. Where their forecast anticipates this growth is even more surprising than many will assume.
The BoC GDP Forecast Requires A Housing Frenzy Similar To 2021
The central bank’s real GDP forecast doesn’t just require housing to pick up. Their forecast shows housing contributing 0.5 points of annual real GDP growth—nearly a quarter (24%) of the total. Back in 2021, historically low rates led to record real estate activity and housing contributed 28% of total real GDP growth. They aren’t expecting a boom. They’re forecasting rate cuts will drive relative demand close to one of the frothiest markets in history.
For context, their latest forecast shows housing contributing 0% to 2024 real GDP growth. It’s easy to dismiss it as a slow year, but it’s similar to the contribution made in 2019 (0 points), and just a little higher than 2018 (-0.1 points). Few would consider housing under-contributing to the economy in those years. Back then, real GDP was nearly 2x more dependent on housing than the US was during its housing bubble that led to the Great Recession.
Most, including the central bank, considered the economy overly dependent on housing back then. A 0-point contribution to real GDP isn’t as small as it sounds—it implies the overallocation managed to keep up with inflation. An overallocation that holds steady is still an overallocation, carrying risk instead of mitigating it.
The Bank of Canada Tried Nothing & Now It’s All Out of Ideas
This isn’t Tiff’s first rodeo; he’s hoping to score a deuce. At the start of 2021, the Governor told reporters the growth was “needed” when asked about the overheating housing market. It followed with record sales and price growth, with a population growing at a third of the rate it advanced last year. It was a stark change in position from when he served as the deputy governor and warned that Canada’s economy was drumroll, overly dependent on housing. Now that he’s in charge, he doesn’t see any other path to growth.
There’s a small note to consider before buying a cashflow negative condo and quitting your job to live off the equity ahead of the central bank’s forecast. Their forecast for 2024 was similar on the assumption that rate cuts would drive investors back into the market for a frenzy. The BoC isn’t forecasting so much as it’s hoping to craft a narrative and set expectations. Unfortunately motivating buyers to actually purchase homes is a little harder than having the central bank’s progress boosted by a change in methodology.
Overvalued houses are the real issue. They became overvalued in the last 20 years because of the ridiculously low rates. Canada is in the 2nd biggest real estate bubble in the world (just behind New Zealand) and yet they think this will continue to be business as usual. The longer this lasts, the more painful the outcome will be when the bubble finally pops.
Plus now, get ready to see the inflation popping back up again in about 12 months.
Silly ole BoC is subject to the insanity of Statistics Canada, which is still in denial that the rest of the world removed mortgage interest from CPI because it makes no sense to have a circular relationship.
Oh, rates are lowered so’s inflation? Rates are up? Oh so’s inflation. What an age we live in. LOL
Corrections and deals are to be had but way too many factors and interests at stake to allow real estate to collapse. I can see a prolonged flatline while wages catch up but no dramatic drop in prices. We can start with all levels of government relying on the taxes and fees collected, to the owners depending on built up equity for retirement. The younger generations anticipating the wealth transfer for their financial security. Then of course all the other stakeholders. Banks, agents, brokers, lawyers, accountants, appraisers, investors, developers, the entire construction industry. Toss in the supply shortage, population growth, the cost to build and the only rational answer is house prices will remain wedged in place.
Just thinking about the time the CMHC said we need higher prices to build more homes.
PS another great take on the data that most news outlets didn’t catch. Nothing normal about 2021, and requiring that kind of dedication is even more toxic to the government.
Absolutely idiotic move. It’s our over reliance on real estate that’s creating the very problems in our economy!
If rent is already nigh unto unaffordable, I hate to see the next 5 years.
When Trump gets elected wait till that day and you will see a rush for the northern borders by illegals by the millions. Trudeau’s cutting a few thousand legal ones but only a fraction of what’s headed our way illegally. Low interest rates will only fuel the housing market along with excess demand like nowhere else in the world
Reactionary response too late, bad timing. Another round of helter skelter real estate flipping but this time the tax collectors are going every transaction possible to feed governments immense appetite for taxes. That is the reasoning I believe is behind this sudden about face. Bankrupt and broke taxpayers don’t pay taxes.
It is amazing that there is so much dependence on housing to grow Canada’s economy and GDP. Why can’t the BOC come up with policies that will help allocate serious funding to other productive sectors of the economy? Housing cannot continue to be the pillar on which GDP depends. Housing should be where people live, not what is used to generate wealth or drive the economy.
There are two things driving Canada’s economy and not much else. Massive immigration and real estate and housing. That will continue to the extreme like never before.
John Law was the first guy that tried 2% interest, in doing so he trashed the currency and caused the first international financial crisis . He, first a hero then became a criminal and fugitive, in the end died broke and stateless. Low interest rates always come out bad. They never learn the Law lesson. Dont know why those modern currency trashers are still at large and deemed economic saviors. Time to vote them out of office for good.