Bouts of pain in property prices could help wake market up to economic and wage realities, economist says
A slowdown in domestic housing could actually be beneficial to Canada's economy, according to a new analysis from Desjardins' economics team.
Desjardins Chief Economist and Strategist Jimmy Jean said in a letter to clients on Tuesday that deceleration off historic highs could restore equilibrium in the residential real estate market, lowering overall risks to financial stability.
“Canadian housing is coming out of two years of torrid activity. Some might even say it’s a bubble market,” he said. “As the market cools, we can expect to see more rational expectations, less erosion of affordability, and yes, slower growth—all healthy side effects. Absent a recession, rebalancing should be manageable from a macro or financial system perspective.”
In recent years, the domestic residential real estate market has been a major crutch for the Canadian economy, contributing for over 10% of total GDP.
Because of its reliance on housing, Canada is particularly vulnerable to a drop in prices and activity, which could force an important segment of the economy to close as interest rates increase.
The current rate-hiking cycle, according to Jean, could cause problems due to the influence of housing on total economic activity, since the Bank of Canada appears to be on track to raise its benchmark rate from 1.50% to somewhere in the mid-two percent area.
"Now that inflation has veered out of control and the Bank of Canada has had to take aggressive action to get rates back to neutral, housing’s prominence in Canada’s economy will likely mean a significant slowdown,” Jean said.
According to the Canadian Real Estate Association, home prices in Canada have decreased progressively during the last two months after reaching a non-seasonally adjusted high of $816,720 in February.
Prices could drop as much as 15% from peak to trough, as per Desjardins, but would still be higher than pre-pandemic levels.
As such, Desjardins believes a correction would help provide some rationality to a market that has seen homes increase by more than 50% in some regions over the pandemic, becoming disconnected from economic and wage realities.
With new available housing in scarce supply, on top of the federal government's lofty immigration plans, Jean believes Canada needs to focus on house construction to accomplish its economic growth goals.
“Lack of supply will be one of Canada’s major economic challenges for years to come, and we’ll continue to need a multi-pronged approach to address it,” he concluded.
