Canada’s economy is heading for a slowdown, and real estate might amplify it. That was the takeaway from the Bank of Canada (BoC) Market Participant Survey in Q1 2023. The survey polls financial market experts for their outlook over the next two years. The results reveal they see a recession this year, with weak housing potentially triggering further downside. Even so, the earliest they see interest rates coming down is next year.
Canada Won’t See Interest Rates Fall In 2023, They’ll Fall In 2024
Canada’s financial market experts don’t see interest rates changing this year. The overnight rate holding 4.50% through the year was unanimous. It’s not until next year that rates are seen tumbling lower, falling 0.5 points in January alone. A forecast cut of 0.5 points in one month implies serious economic storm clouds gathering.
It can’t be that serious though, because rates will hold above pre-pandemic conditions. The median forecast shows the overnight rate falling 1.5 points lower than today, falling to 3% by the end of the year. The 2025 forecast only sees a slight pullback from there, bringing it to just below 3.0% by year end.
Canada Expected To Fall Into Recession This Year
Low rates are seen as good news to Canada’s real estate obsessed population. However, low rates typically mean stagnating economic growth and weak demand. That’s exactly what these experts see in the not-so-distant future—recession.
Expectations for real gross domestic product (GDP) growth are slanted to the downside. The survey’s median forecast expects real GDP to contract by 0.1 points by 2023. Nearly half (48.4%) expect growth to be below 0 points. A further 35% of respondents believe it will be flat to 1 point or less. Just 11.4% of the market participants see anything higher than 1 point, with most of those below 2 points.
We’ve been hearing economist after economist say risks are slanted to the downside. The survey found over 2 in 3 respondents (70.4%) cited weak housing as the biggest downside risk. Tightening financial conditions (51.9% of respondents), and tighter monetary policy (51.9%) round out the top three threats. Those last two might as well be housing, and housing with an economy so dependent on it.
Fewer people agree on upside factors, but most (55.6%) see higher commodity prices helping. A wider than expected deployment of savings (48.1%), and stronger housing (48.1%) round out the biggest upside factors. It’s worth noting that higher commodity prices are generally inflationary, reinforcing higher rates. Also, weaker housing is seen as a bigger downside risk than stronger housing producing upside.
Next Year Canada Will Return To Growth With Cheap Debt
Next year is expected to be a lot better, according to respondents. The median forecast for real GDP growth rises to 2.0% in 2024. Just a handful (11.4%) of respondents see negative growth. Most respondents see healthy growth ranges like 1 to 2 points (29.8% of respondents), and between 2 to 3 points (20.5%). Slow demand this year, but the pace returns to normal within a few months. It’s a little ambitious, but let’s take it.
High inflation leaves monetary policy with few tools to prevent a mild pullback for GDP. After the recent boom that resulted in excess demand, a little moderation should be expected. However, less than one year later things are expected to bounce back. Either the down or upside of those forecasts is overly ambitious. We’ll find out which one soon enough.
I can’t recall a time where the government has let the housing market face any serious downturn (or upturn) beyond a quarter or two before enacting either QE, QT, interest rate change, or other policies such as the mortgage stress tests or the foreign buyer ban with the latter two being “innovative” options to control the market. Real Estate is just too big to let it crash.
So unless the world turns upside down due to war, assertiveness in expanding BRICS or actions by SCO, in my humble opinion it’s the other way around.
The Government will adjust interest rates and combine it with other policies to optimize the Real Estate market (as a whole) for at bare minimum growth, with some markets benefiting more and some less.
Why? Because any other option is just way too ugly to contemplate.
I think anybody with a shred of intuition knows that historical trends have no predictive power at the moment.
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Any price rises in individual items doesn’t cause inflation. Overall average of all prices rises if monetary supply rises more than productive capacity of economy. If money supply remains stable but suddenly oil prices rise then prices of other items will fall by the same amount. Presto- no overall inflation