Not even a buyers' market will ensure better affordability, according to CIBC analysts
The Bank of Canada’s rate hikes primarily aim to bring the country’s inflation rate down to reasonable levels, but they will not address the housing market’s fundamental problems, according to Benjamin Tal and Katherine Judge of the Canadian Imperial Bank of Commerce.
“Interest rates are on the rise, and the ultra-rate-sensitive Canadian housing market is responding. Sales are falling fast, and prices will follow. The adjustment in the market will be directly linked to the speed and magnitude of future rate hikes,” the duo wrote in their recent analysis.
“However, the return to balanced conditions or even a buyers’ market will not cure what ails the Canadian housing market. It will just ease the symptoms for a short period of time.”
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On the contrary, the impending market slowdown might aggravate the supply-demand mismatch. Policymakers are actually misjudging the intensity of demand in the nation’s largest urban markets, Tal and Judge warned.
“Household formation numbers are far from accurate. They are derived by the CMHC by translating population growth into the number of households using estimates of headship rates, or the number of households created from a given number of people. However, plenty of information is being lost in that translation, leading to a gross underestimate of the real number of households in Canada, and thus demand for housing,” the analysts explained.
Therefore, even if activity decelerates due to higher interest rates and mounting purchase costs, the housing affordability crisis will only worsen due to the current policy environment.
“Entering a more relaxed housing environment should not ease the urgency in which the chronic lack of housing supply in the Canadian market is dealt with,” Tal and Judge said.
