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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