Bank of Canada Sees “Robust” Real Estate Investment After Rate Cuts

Canada’s central bank sees real estate becoming an even stronger part of the economy. Bank of Canada (BoC) announced a cut to its key interest rate this morning, as widely expected by markets. The central bank justified the decision by noting the progress made on inflation, as well as excess supplies and labor market slack. They see rate cuts providing a boost to Canada’s economy, especially real estate investment—where they expect “robust growth.” 

Bank of Canada Cuts Rates, Cites Weak Economy & Inflation Progress

The BoC policy rate decision is exactly what the market had almost unanimously expected. The overnight rate was cut by 0.25 points to 4.5%—returning to January 2023-levels. For those with a short memory, this was the level that the BoC previously announced would be a pause, resulting in a frenzy back into the market. Two more additional hikes were subsequently made to calm expectations.

The BoC estimates that rate decisions take between 18 and 24 months to be fully reflected in the market. The past two cuts essentially just rollback the influence of these two moves before they’ve had time to fully impact markets. As a result, the cuts will make an impact on borrowing, but it won’t be to the same extent as ones made to fully adjusted positions.  

Canada’s central bank cited progress on inflation and negative economic data. Headline CPI fell to 2.7% in May, proving the previous month was a blip. Oversupply, rising unemployment, and slack in the labor market were further concerns cited. These factors all imply weaker demand, which is the primary driver of inflation, likely making the central bank more confident in their decision. 

The BoC also made a brief mention of Canada lagging global economic growth. Annual global growth is now forecast at 3% through 2026. Much slower growth is expected in Canada at just 1.4% in 2024. Improvements are expected in 2025 (+2.1%), and 2026 (+2.4%).  

Bank of Canada Expects Real Estate Investment To “Grow Robustly” 

One of the factors expected to drive Canada’s economic boom is—you guessed it, real estate. The central bank’s announcement notes, “residential investment is expected to grow robustly.”  

For those unaware, residential investment is the direct contribution that housing makes to GDP. It includes output from new home building, major renovations, and ownership transfer costs. Once again, the most direct contribution—it’s far from the only contribution. There are many industries that generate significant activity from housing that are considered indirect, such as finance and construction. 

Excessive residential investment is seen as one of the red flags for a real estate bubble. After all, residential investment can’t exist without more credit, which is future income (and consumption). More bluntly, it creates near-term economic activity at the expensive of future activity. In addition, it’s not a good sign when an economy has to dedicate resources increasingly to where people will live, instead of the jobs people in the homes will do. 

Canada’s share of GDP dedicated to residential investment is signficantly higher than US. Not just the US today, but also back in 2006—when they were at the peak of their bubble. The concentration was so dangerously high that experts warned it amplified vulnerability to the point a failure could be critical. That level would be an improvement for Canada. 

Overallocation into any industry is problematic, since a single shock can lead to an abrupt correction. The BoC notes residential investment will improve the economy with lower rates. It also later notes that population growth is projected to slow in 2025. However, it never seems to connect how the two issues can collide. 

8 Comments

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  • Trader Jim 7 months ago

    If I didn’t know better, it sounds like the Bank of Canada is trying to generate demand for their bonds that no one wants. How much did they lose this year already?

    • RW 7 months ago

      and it’s starting to make more sense again. I wish the general news would mention some of these biases from the reporting source.

      This is like the CMHC and its housing mullet—”we help you buy a home” in the front, “our objective is to make more money off of you and we get bonuses when you get more debt” in the back.

  • Odin 7 months ago

    The Bank of Canada would know about rising residential investment—DepFin them in charge of generating the business “on behalf” of the government.

    That doesn’t mean they’re right necessarily, just that they have a vested interest in pumping that narrative.

  • Chris 7 months ago

    What else can they do? Increasingly Canadian economy rests on real estate/construction, subsidized natural resources, money laundering and crime. The four wheels of the economy. The last two are in overdrive (see yesterday’s announcement from Ontario Porv. Police that they are releasing criminals who were caught for violent crimes while on parole for similar crimes) . I think there are not that much else that we can rely on to keep the lights on. Hence all hope in Real Estate and “investors”.

  • Ed 7 months ago

    Nothing growing here, just more and more people putting money into dead assets of RE.

    BOC should know better, we have far too much unproductive investment in RE already. It needs to go DOWN not UP. A BOC Governor should know this.

    The BOC seems to be failing us every which way, in everything they do.. they seem to be consistently WRONG in everything.. and turning into RE and Banking industry shills.

    Time for a change.

  • SweetLordTunderingJesus 7 months ago

    Is anyone surprised the lies and deception just keep coming?!?! Robust you say? Supply is not and will not keep up with any kind of demand you think this will bring, which IMHO will be next to nil. People NEED money to do so. Carbon taxes and Trudeaus green delusions have us all eatting bread 3 meals a day at 5 dollars a loaf. It is absolute insanity these people cannot read the metrics correctly. Keep piling in immigrants with no housing for them or the rest of us. Just like the powers that be want it. Fucking clown shoes.

  • peter 7 months ago

    ” Residential real estate to grow Robustly ” does Tiff have a few presale condos he’s trying to unload? To quote Lincoln ” you can fool all of the people some of the time, you can fool some of the people all the time , but you can’t fool all of the people all the time” The BOC shouldn’t be making market predictions , as in ” Rates will stay low for some time ” they are at the beck and call of Trudeau/ Freeland and her band of bandits at the MOF. A dangerous precedent . We shouldn’t be pegging against the American Dollar , let’s be realistic and go for the Peso , their debt/GDP is 56% , have look at ours

  • Andrew Baldwin 7 months ago

    Governor Macklem’s opening statement included this remark: “The Bank’s preferred measures of core inflation are expected to slow to about 2½% in the second half of 2024 and ease further in 2025.” This refers to CPI-median and CPI-trim, since the Bank of Canada rather strangely dropped CPI-common very shortly after it had reinstalled it again as part of its operational guide with the 2021 renewal of the inflation-control agreement, the more strangely as the announcement of the renewal agreement was chronically delayed, so you would have thought they had lots of time to nail everything down. But I digress. Unfortunately, neither of these two core measures is really fit for purpose as neither excludes mortgage interest cost on principle, which the previous operational guide, CPIX did. CPIX was already at 2.0% in March 2024, and has been below 2.0% since then: 1.9% in April, 1.6% in May and 1.9% in June. It should be noted that a revised CPIX that excluded government-driven components that in no way constituted payments for goods or services: property taxes, vehicle registration fees and drivers’ licences, would have showed even lower annual inflation rates: 2.0% in February, 1.9% in March, 1.6% in April, 1.7% in May and 1.8% in June. A return to the CPIX as the operational guide with the exclusion of 10 rather than eight components would certainly be an improvement over the Bank of Canada does now. If they insist on using non-exclusionary core inflation measures like CPI-trim and CPI-median, they should apply these formulas to an adjusted CPI, which excludes changes in indirect taxes and these four items: mortgage interest cost, property taxes, vehicle registration fees and drivers’ licenses.

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