Bank of Canada Sees Real Estate Softening “Gradually”

Canada’s central bank didn’t devote a whole section for real estate to their latest monthly report like they usually do. However, the Bank of Canada (BoC) did provide a lot of insights in the January Monetary Policy Report. The central bank believes “elevated” housing activity was the result of a shift in buying behavior, as well as cheap money. They expect this to moderate as the year goes on, as well as soften future price growth. 

BOC Attributes Housing Boom To Shift In Preference

The central bank believes the housing boom was the result of a sudden shift in preference. They point to accelerating single-family home price growth, while apartments slow. Analysts from the organization attribute the shift in preference to “low financing costs.” It must have been a total shock how those costs became so low.

Preference To Normalize, and Soften Home Price Growth

The central bank sees this trend slowing later in the year, as preferences normalize. The sudden surge in housing activity is believed to be a temporary behavior. As the impact from low financing catches up, housing activity will “soften gradually.” When the temporary surge ends, they see housing moving with household formation. As housing activity softens, “price growth should soften” as well.

Housing’s Contribution To GDP Revised Higher

The central bank also revised the outlook on housing’s contribution to real GDP growth points. In 2021, they forecast housing will contribute 0.7 points towards total real GDP growth. This is up from the previously forecasted massive 0.6 points. Last year’s data is expected to show 0.3 points of growth, up from the previous forecast of 0.1 points. In 2022, it’s still expected to have no change in contribution to total GDP.

The market is much busier than the central bank expected, even if they didn’t state it. Housing’s contribution to 2020’s real GDP growth is revised to triple their expectations. It’s also hard to appreciate just how much 0.7 points of GDP growth in 2021 really is. All due to housing, during what was billed as the biggest recession in history. Further, it’s all being chocked up to cheap debt. 

The BoC didn’t expect such a robust year for home sales, but now expects it will continue into the new year. The unexpected trend is being attributed to lower mortgage financing costs, the direct goal of one of their programs. This is a whole other post for another day, but an unexpected trend that’s ultimately the result of one of their own programs isn’t a great look. In fact, it demonstrates the previous management at the BoC didn’t quite have a grasp on how their actions translated into the real world.

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  • Kyle 3 years ago

    The Bank of Canada will always drop rates to pump prices higher. It’s more Canadian than the maple leaf.

    • Doomcouver 3 years ago

      I don’t think that’s entirely true. In recent history yes they seem to continuously want to lower rates regardless of the state of the economy, but the catalyst allowing them to do this is the so called “missing inflation”. Normally with rates this low inflation would be running red-hot, however despite having pockets of high inflation in some sectors, broadly speaking inflation is pretty low. Why this is happening is argued amongst economists the world over, and it’s a global trend. However, if high inflation were to re-appear (say from a massive shock to the money supply like is happening now) it will limit what the BoC can do in terms of rate policy and they’ll be forced into a rate hike bias pretty quickly.

      • Bob Walter 3 years ago

        What you leave out is how inflation is calculated nowadays. Everything that matters for Joe Modal like grocery prices, gasoline prices.. the basic cost of living is largely not part of measured inflation because those are deemed “Transient” effect.

        The point is real inflation numbers are suppressed in order to give more leeway into bank policy that “relies” on inflation.

        Only thing is people do not pay their bills with Transient dollars.

        Inflation is tied to money supply ultimately. Paying down debts is deflationary. They have been creating a WHOLE lot of money supply (Modern Monetary Policy). So this means either the real inflation reports is going to be suppressed, or it’s going to show later down the line. It’s probably a combination of both.
        What you can be sure of is you are going to be paying more in the stores, more at the pump, more taxes and generally more of everything and you can expect your wages to remain largely stagnant by suppression with immigration.

      • Trader Jim 3 years ago

        It’s not entirely true, but the more a government needs to borrow, the lower rates will need to be. In effect, real estate prices are directly related to government revenues and prices.

        That aside, they did create a bond program to lower rates and drive prices higher the second they thought prices could come down.

      • Rusty Shackleford 3 years ago

        We are seeing the increases come through in a big way in commodity prices.

        Wont be long before that impacts end user prices.

        They will only be able to get away with blaming “covid related supply chain disruptions” for so long

      • Smaug 3 years ago

        If house prices counted in the inflation index (they don’t), where do you suppose inflation would be right now? The inflation is there, it just isn’t included in the CPI. It’s a massive flaw in the CPI.

        There’s an economic maxim called “Goodhart’s law”, named after an economist who used to work for the Bank of England. He postulated that any measure that becomes a policy target eventually ceases to be an accurate measure or a good policy target. The CPI, in my opinion, is the poster child for that theory.

        The last major revamp of the index was the late 80s, and at that time, it probably made sense for a bunch of reasons to keep the net acquisition of house prices out of the index. However, over the years, with the BoC targeting a CPI that only measures net replacement cost of housing, as opposed to net acquisition cost as it would for any other index item, they succeed in keeping inflation “low” while actual inflation – and our cost of living – rages in the housing market. Also, perversely, the housing component of the CPI includes mortgage rates. So lower mortgage rates tend to make the CPI lower, even while boosting actual house prices.

        So when we say inflation is “missing”, it’s only missing from the narrow indices we use to measure it. It’s not missing from the economy, it’s alive and well and pumping asset prices globally.

  • TorontoMagistrate 3 years ago

    Hey Doom,

    I don’t know where you are living but inflation during this pandemic is sky high. The sheer cost of things are astronomical. If all we are relying on is R/E to contribute to our GDP then we better stop buying houses that are way outta our price ranges and demand Libs and the TramaTeacher be replaced. Where’s our infrastructure and growth? Nothing happening in this country but buying houses andgoing buzerk when rates rise.

  • Gerry 3 years ago

    Blah, blah, blah say the economist sheep as young people fall further and further from ever being able to afford a home. Thanks Boomers, you screwed us good.

  • fred 3 years ago

    I do not know What do they somke , but it must have been something good.
    First they say inflation below %2 everybody lives in real word they know most of goods are %30 higher than last year
    And about real estate look:

    • 123jerk 3 years ago

      Goods are 30% higher than last year?! Wtf are you smoking?

    • Michael 3 years ago

      That 2% is a joke even if you exclude real estate. Just go to the grocery or hardware store where some items have doubled in price.

    • Rob 3 years ago


      A Cantillon effect is a change in relative prices resulting from a change in money supply, which was first described by 18th century economist Richard Cantillon. … The resulting relative price changes that occur which may confuse observers over whether the economy is undergoing overall inflation or deflation.

  • Rob 3 years ago

    “The BoC didn’t expect such a robust year for home sales”
    Give people money at lower rates and the price of homes go up

    Go figure 🤷

    • Sam 3 years ago

      I think we can assume that all of the BOC’s quantitative easing strategies, including purchasing MBS’s financed by CMB’s, were intended to inject liquidity to keep markets moving at a healthy rate. This includes the housing industry, which has been a prime contributor to overall GDP, especially since oil prices plummeted hurting our resource industry.

      The BOC is looking at the indicators and tying interest rates & policy to inflation, as it’s done for years. Problem is, although the status quo over the last decade in Real Estate may look good as far as propelling the economy and buffering the indicators, it has had the side effect of driving up housing and household debt loads. It was a bad recipe from the start.

      Housing should be a regulated free market industry where mortgages are separated and stay within the 5-8% range and other added regulations to deter crass speculation and over-leveraging, as well as over-purchasing.

      Unfortunately the damage has been done. There will be pain.

  • WS from the defunct Blog 3 years ago
    “Bank of Canada Governor Isn’t Worried About a Housing Bubble”
    Tiff Macklem said:“We are conscious that there are some risks here,” he said. “We are going to have to keep an eye on this and avoid a build up of vulnerabilities.”
    Two possible reasons for what he said:
    1) People like Tiff are totally detached from reality.
    2) Lying

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