First National Financial LP

Residential Market Commentary - Collateral damage in the inflation fight?

  • First National Financial LP

There is a growing sentiment among market watchers that the Bank of Canada’s current fight against inflation is putting home prices in the crosshairs.

In the release of the Bank’s annual Financial System Review, Governor Tiff Macklem mentioned a desire for “moderation” in the housing market several times.  But he made the Bank’s priority clear.

"The housing market, it's an important part of the economy,” he said.  We are watching it closely, but our focus ultimately is on the whole economy and in getting inflation back to target.”

That has some analysts speculating that the central bank may be willing to let housing prices and the general economy take a hit in the effort to tame inflation

With interest rates on the rise, the housing market has already seen a downturn in sales and prices, especially in the hottest markets.  While a 10% reduction in prices would reverse several months of gains, it would not be devastating to long-term homeowners or the economy as a whole.  But some recent reports have predicted a 15% decline in prices.  That could be particularly hard on those who bought at the height of the pandemic market.

The central bank is also warning that those buyers could be facing a 30% increase in their mortgage payments when they renew in 5 years.  The Bank’s current projections put fixed rates at 4.5% in 2025-26 with variable rates at 4.4%.

Debt-strapped Canadian households could find themselves forced to cut other spending to service their mortgage.  Taking that money out of the broader economy could slow, or reverse, the on-going recovery.