After a year that might charitably be described as an up-and-down one for Canada’s mortgage market, homeowners and buyers alike are hoping for a sunnier outlook in 2024.
Rising interest rates helped further squeeze housing affordability for new buyers and pummelled the budgets of many existing owners during the past 12 months, with the Bank of Canada’s war on stubbornly high inflation helping contribute to a gloomy market throughout the year.
Still, there was some room for optimism at year-end, with three consecutive rate holds by the central bank – following an aggressive 16-month campaign of hikes – fuelling speculation that rates will begin to fall in the coming year.
While that might see hopes rise for a resurgence in Canada’s housing and mortgage markets, it’s important not to lose sight of the likelihood that the economy will remain sluggish for much of this year, according to a leading economist.
Speaking to Canadian Mortgage Professional in December, Bank of Montreal (BMO) chief economist Doug Porter said that the Bank of Canada’s rate increases throughout 2022 and 2023 would probably continue to stymy chances of a significant economic upswing.
“We think a good way to look at it is [that] over the last six or seven months, the economy really hasn’t grown at all,” he said. “We think that’s going to be the story for the next six to nine months as well. It’s going to be a challenge to grow.
“The reality is the economy and the mortgage market have not completely digested the rising interest rates we’ve seen to date. We think it will weigh on the economy further. It’s possible that we are looking at a shallow recession.”
Home sales uptick provides BoC with food for thought
December saw home sales post a surprising spike across many major Canadian markets, a development Porter noted this week may be greeted with dismay by observers hoping for imminent rate cuts by the central bank.
“While it’s always dicey to read much into housing activity in the middle of winter, even a flash of strength on this front could revive bad memories for the Bank of last spring’s surprising snap-back in home sales and prices,” he wrote.
The Bank will be viewing sales activity with great interest in the opening months of this year, Porter said, as it weighs up whether the economy has cooled sufficiently to open the door for a rate drop. “Activity is still quiet, but even a hint of a firmer demand/supply balance amid pending rate cuts could readily fire the sector back up again.”
Wage growth, meanwhile, continued at a noteworthy clip in December, coming in at 5.8% for the month despite a higher unemployment rate on a year-over-year basis.
Still, “mixed” labour market data provided just enough indication that the economy was still soft in the fourth quarter, according to Royal Bank of Canada (RBC) assistant chief economist Nathan Janzen.
He said in a note that while “the bottom wasn’t falling out from under Canadian labour markets in December” the unemployment rate had still risen noticeably in recent months and hours worked outright continued to fall.
“The Bank of Canada will still be cautious about pivoting to rate cuts too quickly – and wage growth is still running above the pace historically consistent with their 2% inflation target,” he said.
“But our own expectation is that the economic backdrop is soft enough for inflation to continue to move lower and that the BoC will start to push the overnight rate lower around mid-year this year.”
How significantly could Canada’s economy slow in 2024?
Fears of a sharp and protracted downturn for Canada’s economy have thus far proven ill-founded, with the labour market and overall output remaining steady, if muted, last year in the face of central bank rate hikes.
A meltdown is unlikely to occur in 2024, Porter told CMP in December, although that’s not to say it’ll be plain sailing all the way.
“I’m often asked: ‘Will this be a soft landing or a hard landing?’ I say it’s going to be a bumpy landing,” he said. “Maybe not hard. But there are some challenges, and we’ve already had a big bump with the unemployment rate going up a fair bit last year and that negative quarter of GDP [gross domestic product] in the third quarter. It shows the economy already is struggling.”
Source CMP
By Fergal McAlinden