Canada: Sharp slowdown in housing market may force BoC to maintain status quo for medium term – Deutsche Bank

Analysts at Deutsche Bank points out that the market has been speculating on a sharp slowdown in the Canadian housing market and hence a Bank of Canada barely tightening for the next two years.

Key Quotes

“At one extreme, some expect a credit crisis with which we disagree. On the other extreme, some economists call for the Bank of Canada to hike, amplifying existing contra-cyclical measures. A detailed look at the Greater Toronto area housing market price dynamics does not suggest the Bank of Canada would revise substantially lower its growth and CPI forecasts.”

“While today’s BoC meeting today will not be accompanied by a forecast update or press conference, they are nonetheless expected to remain exceedingly dovish. Similar to last month, we expect the BoC to acknowledge recent improvements but reiterate that "it is too early to conclude that the economy is on a sustainable path." Given that interest rate tightening expectations are exceedingly low and almost historically so versus those of the Federal Reserve, the risk for USD/CAD is tilted tactically to the downside.”

“Measures to cool the Toronto housing market have led to a sharp increase in the amount of houses available for sale, while sales were muted by the Easter weekend according to the Toronto Real Estate Board. Typically, inventory that does not clear, leads prices to adjust lower though this process of clearance seems still ongoing.”

“As rents will no longer be able to grow faster than inflation and be capped at 2.5%, existing rental buildings coming to the market will price rents at the high end. Construction of such buildings that are ongoing will be switched to condominiums increasing its supply while increasing rents for newly formed households and the steady flow of immigrants. This is increased by the troubles in the alternate mortgage industry which increases the costs for new immigrants to purchase a home. Nonetheless, the Toronto market remains competitive with global cities, a point that is generally overlooked.”

“Rents are likely to move higher driven by new buildings and new tenants as is the case in Switzerland where rents are linked to the CPI. This feeds into a positive price dynamics nationally with the new housing prices index up 3.3% year on year. Hence the wealth effect is still a positive driver of consumption. Indeed, the Bank of Canada upgraded its housing contribution in 2017 to +30 bps from -10bps in the Jan MPR and is unlikely to reduce it significantly.”