Bank of Canada sees housing rebound but ‘considerable uncertainty’ in prices

The Bank of Canada is expecting the housing market will “rebound” this year amid expectations for interest rate cuts sometime in 2024.

The head of the central bank warned, however, that the outlook for home prices in the recovery comes with “considerable uncertainty.”

Bank of Canada governor Tiff Macklem spoke to reporters after giving a speech to the Montreal Council on Foreign Relations Tuesday.

Canada’s top monetary policymaker was asked whether he was concerned that pent-up demand in the housing market would complicate efforts to cool the economy if buyers flood back into the market when the central bank eventually starts cutting its benchmark interest rate.

The Bank of Canada has held its policy rate steady at 5.0 per cent in four consecutive decisions following a rapid tightening cycle that saw it raise the cost of borrowing to tamp down inflation, which has cooled significantly over that period. High interest rates make it harder for prospective homebuyers to afford a mortgage, pushing down demand in the market.

While Macklem has maintained that the Bank of Canada expects to keep its key rate at current levels until underlying inflation shows clearer signs of easing, some forecasters and market watchers have pencilled in rate cuts starting as early as April or June.

1:41 BoC monetary policy targets inflation, not housing: Macklem

Macklem said that while the housing market contracted under the weight of higher rates in 2023, the Bank of Canada’s forecasts in its latest monetary policy report released last month calls for a “rebound” in housing this year.

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The Bank of Canada expects real gross domestic product tied to housing will rise 0.4 percentage points in 2024, up from a contraction of 0.9 percentage points in the segment last year.

Macklem also said that the central bank expects a “modest increase” in home prices compared to the decline in 2023, but acknowledged that will depend on how busy the housing market is this year.

“There’s certainly considerable uncertainty around what will happen to prices and it’s going to obviously reflect the response in demand,” he said.

In his speech, Macklem reiterated that shelter price inflation remains one of the key factors keeping the cost of living higher right now, but said there’s little the Bank of Canada can do to tame these pressures.

He pointed to structural supply shortages for housing keeping shelter inflation high, while the central bank’s policy rate can only work to keep a lid on demand.

The Bank of Canada’s top officials have previously expressed concerns about the impact of loosening monetary policy on the housing market.

1:49 Economists expect spring interest rate cut after Bank of Canada holds steady

The minutes from the Bank of Canada governing council’s Dec. 6, 2023 interest rate decision showed concern within the central bank about cutting interest rates early and reigniting inflationary pressures.

“Members noted that if financial conditions eased prematurely, the housing market could rebound, further fuelling shelter price pressures,” the deliberations read.

The release of the deliberations from the Bank of Canada’s rate decision on Jan. 24 is due Wednesday.