Canada’s central bank is about to take away the punch bowl real estate has been binging on for the past few years. The National Bank of Canada (National Bank) has forecast interest rates will rise over the next few weeks to combat inflation. Canada’s freshly lowered neutral rate means this will top out fairly fast, though.
Canadians Should Expect Interest Rates To Rise 500% This Year
National Bank sees interest rates doing a steep climb this year, and they expect it to start within weeks. In the first quarter, the Bank of Canada (BoC) is forecast to raise rates by 25 basis points (bps). This would bring the overnight rate to 0.50%, double the current level.
In total, the bank has forecast five interest rate hikes in 2022. By the end of this year, the overnight rate should be 1.50%. That’s 500% higher than the current level, so expect this to dampen inflation… amongst other things.
Canadian Interest Rates To Top Out Fairly Fast
Canadian interest rates are forecast to rise next year, but the heavy lifting will be done. The BoC is forecast to hike 25 bps in Q2 2023, pushing the overnight rate to 1.75%. No change is expected for the remainder of next year, or the year after.
Bank of Canada’s Lowered Neutral Rate Means The Next Recession Won’t Be So Kind
Recently the BoC lowered its neutral rate. The neutral rate is the level where it no longer provides stimulus, but inflation is at a stable rate. The new target is believed to be 1.75%, meaning the National Bank forecast will hit it soon. A lower neutral rate is something even the central bank had to express concerns about.
“Neutral interest rates are likely to be lower than in the past, which means that central banks will have less room to lower their policy interest rates in the face of large adverse shocks to the economy,” said both the Government of Canada and the BoC in a joint statement.
Canada ignored its addiction to low rates and high debt loads before 2020. While times were good, they leaned on household debt growth to pad performance. Now that the neutral rate will be hit fairly quickly, economic growth may mature fast. It’s not hard to see why the OECD has forecast Canada will see low per capita GDP growth for the next 40 years.
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What? The propeller heads left themselves no room to manoeuver to solve the very same problem they created?
I’m shocked, I say – shocked!
Keep you powder dry boys. They’re gonna finally pop the bubble.
1.5 million dollar townhouses for 600k-700k here we go
Just as I hit the post button, I saw the button for article from 2020 titled
National Bank Of Canada Forecasts Sharpest Real Estate Price Decline Ever
JUNE 9, 2020
Umm. NBC is gping to be right this time right?
Depends. Will Canada print 20% more money like it did in 2020 to save the housing market, and quietly prepare to substantially raise taxes to pay it back in a few years?
Few people understand they increased home prices at the expense of being the worst performing OECD economy this decade.
I don’t see how that’s possible in Ontario where there is a massive housing shortage. For example, If your forcast is true I could gobble up rental duplexes for $400k and make yearly returns of 20% on the rental payments alone. From what I can see in Ontario most of the real estate prices are supported by fundamentals such as rental prices, construction cost, etc.
Lol. Fundamentals went out the door a long time ago. Real wages are not keeping up with this market. As for gobbling up rental properties at fire sale prices, good luck with that. Policy will likely be introduced to allow private equity funds to purchase housing as a means to stabilize what would be a free falling market. You can’t compete with these funds. Just look down south and see what BlackRock is doing; they’re buying up entire neighborhoods.
I don’t think so. Such a drop in real estate would mean total collapse of the Canadian Economy. We would be like Venezuela. For example all the HELOC companies would require paybacks of tens and hundreds of thousands from countless borrowers to adjust the portion of loan backed by the house. Mostly from boomers unable to rise money.
Most credit unions with thousands of underwater mortgages could become insolvent very quickly. Banks would be in dire straits.
“Investors” who borrowed cheap to speculate in real estate would be unable to service their obligations and 25% of real estate purchases in Toronto are made by “investors”.
It would be HELL.
I see the government (Lib or Con.) subsidize foreign buyers rather than allow this to happen.
Really what they’re saying here is that we’ll start raising rates this year and finish the tightening with a sixth and final raise in early 2023 (topping @1.75%) but after that we quit.
Right now the markets (and all the pundits) are talking about the FOMC raising rates matching this but continuing through 2023 as well (8+ hikes to the end of 2023 w/90% certainty it starts in March).
So there’ll be a better return and less risk south of the boarder, and foreign money will ALWAYS look for the better risk adjusted return.
Trying to fight this by simply having the government step in (which would require BoC to print a bunch more CAD) would certainly turn us into the next Venezuela. Getting out of step on the rate cycle with the FED is a non-option for Canada.
Finally, just because the outcome is bad doesn’t mean it can’t happen or that the government will be able to fight it successfully.
If more subsidization (fiscal & monetary injection) happens, the worse these imbalances become. It could happen, but eventually it won’t work anymore or be very ineffective (ie. the resulting asset and consumer inflation may become untenable and stimulus may not be an option without very negative consequences).
Humankind has never had a bubble go on forever. Now is no different. Imbalances do eventually correct; the elastic cannot be stretched without end.
When is the question, but it’s usually no more than a few years at most…
—It would be HELL.—-
That’s what THEY want.
Are you ready for GREAT RESET?
Burn money, finances, ownership, savings and …. “start from the scratch”.
You got it right!!!
Where is the problem?
Don’t you understand, it’ll be HELLLL!
People will be forced to pay back money they borrowed, investors who have been driving up prices may be forced to sell at a LOSS! Average Canadians may be able to afford houses again! Such a grim fate.
Do people realize this is going to happen at some point whether the government wants it to or not? Canadian homeowners smugly act as if bubbles can be controlled 100% and forever, but as history teaches us that is absolutely not the case.
I don’t think so. The banks would be fine, they have so much liquidity right now everyone in the country could lose their shirts and they’d still be fine. The problem for the banks right now is MAKING money. With rates so low and money so cheap its hard to turn a profit for any investor NOT in real estate. Your assumption is that real estate in the ONLY investment in Canada. IF that is true Canada is already boned.
Mortgages and HELCO’s are insured btw, there is no risk to the banks.
Chris P, the bank of Canada does not operate in a vacuum and we are but a speck in the global financial system. Do you think the US FED cares about Canadian housing investors who over leveraged themselves? The US FED is not going to allow their currency to continue to be devalued by inflation at a rate of 7+% a year.
If the US FED begins a tightening cycle and raises rates and Canada doesn’t the Canadian dollar will plummet. US Fed leads and Canada follows 92% of the time.
Best of luck to you.
also, a lower CAD spurs more inflation as we buy all our foreign goods in USD
Pretty much guaranteed, though it won’t happen overnight. Took a few years the last couple of housing bubbles. But them everything nowadays is so accelerated, so who knows.
Unfortunately I have no confidence that the BoC will do the right thing and actually end QE/raise rates/start QT. I think they’ll get at most one or two rate increases in, and that’ll slam the housing market – cue the realtor & homeower screeching!
The govt & all politicians are just too invested in high housing prices to ever willingly let them fall. It’s the same situation as the Fed who is talking a big line about ending QE and raising rates, but just let the US stock market fall 20% and they’ll do absolutely anything to push it back up. (Aka Fed put)
Canada similarly will do absolutely anything to turn around a falling real estate market, no matter how much higher rates and a RE correction are desperately needed for Canada to return to sanity and future growth. When real estate is our whole economy, NIRP & QE to infinity are our future.
It’s disgusting, but Canadian politicians & BoC will never risk not supporting RE no matter what, so I fully expect a minimal house price drop then liftoff again (as has already happened repeatedly). The CAD can hit $0.25 USD and they won’t care about the imported inflation, just find more ways to lie about the CPI number. And it’s good for exporters!
But, eventually there’ll be rioting in the streets here over the heavy inflation and currency debasement effects, combined with our overdependence on debt, and Canada will be in a depression for a generation. And we’ll finally have our house price collapse!
I won’t stay here then though – there’ll be nothing here for us and our kids except a lower standard of living, higher crime, and much higher taxes due to current idiocy.
Already making plans for departure in 6 years, hopefully that’s soon enough. They’ve kept the Ponzi inflated far longer that I thought possible, so hope a bit longer yet. First I need to move a lot more money out of the country before it’s debased any further. But where to put it? Considering some into CHF, but unfortunately Switzerland also had high debt. But they’re much closer to sound money than Canada or US.
The idea of the housing market being too big to fail is inherently non-sensical. As in the Ottoman Empire?
The key word in your post is “willingly”, the BofC is now between a rock and hard place. Willingly has nothing to do with it. Canada may be mostly rock, but it isn’t an island.
And as has been pointed out by Better Dwelling in innumerable ways, we
are more than likely the most over-leveraged fundamentals-flaunter amongst western economies.
An old Red Rose tea commercial may well have put it best:
“Only in Canada you say? Pity”.
What you’ve said is spot on. Where you need to be putting your money is in Bitcoin though, not other fiat currencies that will suffer the same fate.
1.5% is a nothing burger. Just back to 2019.
% has no context until you include debt levels which are substantially higher than they were in 2019
D might be right Alex – it will be a nothing burger for a lot of people. They will have nothing burger equity and nothing burger disposable income because they’re paying 1.25% more on their albatross.
Hello Chris P!!!
Why in God’s name would the Gov’t subsidize foreign buyers of Canadian homes.
Do you truly believe Gov’ts today actually care about the people, that train left the station over 20 yrs ago my friend. An economic collapse in Canada is just what the New Order devils like Trudeau are waiting for so they can swoop in and acquire more of what’s left of our pathetic sovereignty.
That’s 100% the issue. It’s an even bigger issue that the neutral rate is falling though.
If we just successfully engineered an economic boom during COVID, why couldn’t we do it again for something else? Some house prices doubled during COVID. The recession lasted 2 months, and then many people got wealthier than they ever imagined, in stocks, crypto and real estate. That is a massive win from the feds perspective.
I also think a normal rate of 1.75% is still highly stimulative. Whenever the central bank suppresses borrowing rates negative in real terms (nominal – inflation), that is stimulative. I would imagine in the absence of a central bank interest rates would more closely follow inflation expectations. The fed suppresses the rates in order to incentivize investment and spending because holding cash on anything more than a temporary basis means you guaranteed lose money to inflation.
Just sold my two houses in Toronto bought in 05 and 07 for 700k. After taxes, agent fees and bank fees, I collected 3m in total and moved the money to Dubai where I was working. Bought a 4 bed house with pool for 1m, bought 2 rentals props that pay me 4k per month in rent for 1m and stuck the other 1m in stocks and bonds. I make about a 100k a year tax free and am rent/mortgage free and still have by 200k a year job on the side. Not planning to return anytime soon and see no future for my kids with the current state of affairs with real estate. I would not be able to afford a house with my income so what future would my kids have.
no one makes money until they sell – Congrats!
We have borrowed more than necessary from the future, is it time to pay for those choices? I’d like to think a correction is looming, but it will take years for the Canadian mindset of “real estate up only” to change.
Now that residential real estate has been financialized and considering how far out valuations are, we may be surprised at how quickly prices may drop.
A very large number of dwellings are now investor-owned (rather than end-user owned) and they own for two reasons only – expected appreciation and steady fixed cash flow – and both are linked to valuation/price. If an initial price decline occurs and a new trend downward appears imminent, many owners of investor-owned dwellings would be very motivated to sell (and may move quick).
Pile other potential sellers/holdouts on top of that – retirees or near-retirees looking for top dollar; those who bought too much house in the last few years and worried about being underwater; possible casualties if a recession ensues; etc. – and there could be quite a waterfall of new listings.
Suddenly, we’ll see that supply was never the issue, but it was house hoarding & holding out (caused by policies that produced a ‘never can lose’ market psychology) that lead to ever lower turnover. Turnover is the issue – everyone wants to hold onto the golden goose…until it’s shown to actually be rotten.
At the same time, a larger than normal amount of future local end-user demand was pulled forward due to FOMO.
With new listings growing (and actual supply growing at a significant clip), investor demand waning, and local end-user demand more than met by being pulled forward, prices will likely continue to erode. Any interested buyers are likely to ‘stand back’ as prices drop to find their new fair equilibrium that is better supported by fundamentals.
In all this, a persistent level of consumer inflation will likely impede the usual options of “massive fiscal injections” or “dropping rates to .25%”, especially if the rest of the world is still in okay shape (and considering this is how we got here in the first place!)
Never before in the history of humankind has a bubble continued indefinitely. This time will be no different. Eventually, these sorts of imbalances can’t be continued and the elastic will snap back. The big question is – when might this happen??
if the BoC raises at the end of January it could have a profound effect on market psychology and really impact the Spring Market
I believe Victoria Grant made the best comment on the Canadian economy several years ago and she was just a wee slip of a girl of 12 years of age at the time! Now she’s over 21 and of age to give an adult opinion…I’d sure like to hear it!
A reality check on the housing bubble is now in order, and will inevitably happen! The only question is… when? And it will happen quickly and when least expected, as it always does…so beware!!!
Everyone should check our Jeff Booth’s theory on whats happening here with inflation and the housing market.
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