By Fergal Smith
TORONTO (Reuters) – Signs of a recovery in Canada’s housing market after a year-long slump, just as higher borrowing costs are expected to slow much of the rest of the economy, could increase inflation and delay a shift by the central bank to cut interest rates , said analysts.
The housing market rebound comes after the Bank of Canada paused its rate hike campaign last month, leaving the benchmark interest rate stuck at a 15-year high of 4.50% since January.
In addition, analysts say higher borrowing costs have so far caused less financial stress for homebuyers than they expected, so the market has not had to absorb an influx of supply from forced sellers.
The BoC is counting on slower economic growth to bring inflation back to its target of 2%. A recovery in the housing market could boost activity and contribute directly to price pressures.
“The Bank of Canada probably won’t be too excited at the end of the day if the housing market really starts to pick up,” said Robert Kavcic, a senior economist at BMO Capital Markets. “From a housing cost standpoint, you’re going to see more upward pressure on inflation in the second half of this year.”
The cost of lodging has the highest weighting in the Canadian consumer price index, accounting for 30%. And house prices are generally highly visible, so an increase could have a pronounced effect on inflation expectations, analysts say.
The median home price in the Greater Toronto Area, Canada’s most populous metropolitan region, rose month-on-month for the third straight month in April, as sales also rose. Other major markets also posted gains.
Despite higher borrowing costs, mortgage default rates have remained low in Canada for now after mortgage borrowers passed a stress test that showed they could manage if interest rates were 2 percentage points higher than the rate on their loan.
In addition, variable-rate borrowers are protected from higher interest rates after lenders temporarily extend the period over which their debt is written off, keeping their payments the same.
“One of the reasons the market has been able to stabilize so quickly is that there’s just no forced selling,” Kavcic said.
Things may change – Royal Bank of Canada recently warned of the risk of mortgage delinquencies rising by more than a third in the coming year.
The other concern is that the stress in the US regional banking sector could spill over to Canada. Clues on that front could come from the BoC’s Financial System Review — an annual review of tensions in the financial system — to be released on Thursday.
But there are also tailwinds to support a recovery, including supply shortages, record levels of immigration and a strong job market, analysts said.
Wage growth could cool in the coming months, which could push inflation down, but it is unlikely that the Bank of Canada will rush to cut interest rates if housing prices skyrocket again,” said Stephen Brown, Canada senior economist at Capital. Economics. said in a note.
(Reporting by Fergal Smith; editing by Steve Scherer and Jonathan Oatis)
