Interest rate cuts will only add fuel to an already hot market, says a new report
Lower interest rates will throw more fuel onto the fire that is Canada’s housing market and lead to a strong increase in resale home prices and residential investment this year, despite an economy that looks to be on the brink of a recession.
A report from The Conference Board of Canada warned that the Canadian economy – already on “precarious footing” in the fourth quarter of 2019 – could contract by a projected 2.7% in the second quarter of 2020, as challenges from rail blockades, a collapse in oil prices, and the ongoing COVID-19 pandemic take their toll. However, the report forecasted that the economy would rebound to 2.5% growth in 2021.
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“Despite the fact that the global economy is currently shaken at its core, we expect to see growth resume in the third quarter, meaning that the economy will avoid a technical recession,” said Matthew Stewart, director economic forecasting at The Conference Board of Canada. “However, due to the unpredictability of the coronavirus, there are still huge downside risks to the outlook.”
And despite the gloom, The Conference Board said that housing markets are still set for a “big year.”
“While recent interest rate cuts by the Bank of Canada are meant to cushion Canada’s softening economy, they will only add fuel to Canada’s already hot housing market,” the report said. “Interest rates were already low and recent cuts will make it even cheaper to finance a new home purchase. The two other main underpinnings for housing – employment gains and population growth – have also been strong and have driven many resale markets, most notably in Ontario and Quebec, to the point of overheating.”
However, the report warned that the economic fallout from COVID-19 could still create a recession that derails housing demand. It also warned that homebuyers might flinch at the “eyewatering prices” in many cities and lose confidence that the value of their potential new homes will continue to rise in the future.”
