BoC to Lower Rates Beginning in Q2 2024; 2024 Housing Prices Should Remain Unchanged

Recent remarks by BoC Governor Tiff Macklem that "interest rates may now be restrictive enough" in light of the end of excess demand and the continuation of feeble growth lead most to believe the central bank is done raising rates.

However, Macklem added, "At this time, it is not prudent to consider interest rate cuts."

After contracting 0.2% in April-June, the economy was anticipated to have expanded at a moderate annualised rate of 0.2% in the previous quarter. However, inflation has declined substantially from its highest of 8.1% in June 2022 to 3.1% last month.

Aside from one, twenty-six economists surveyed by Reuters between November 27 and 30 predicted that the Bank of Canada would maintain its key policy rate at 5% until at least the end of March, a position consistent with that of the Federal Reserve of the United States.

In January, only Barclays anticipates an additional 25 basis point rate increase. Futures on interest rates anticipate the first rate reduction in March, which is earlier than the poll forecast.

"It is abundantly clear from the past two quarters that interest rates in the vicinity of 5% are a substantial impediment to growth," said Avery Shenfeld, chief economist at CIBC Capital Markets. "While this is advantageous at this time as the BoC attempts to contain inflation, it is untenable to maintain such a drag for the entire year ahead."

"Our call does imply a bigger gap between U.S. and Canadian rates, but that's consistent with the evidence at hand that shows the American economy, due to lower household debt levels and locked-in long-term mortgages, is better able to withstand interest rates near 5%."

The poll forecasts that the BoC will begin reducing interest rates in the second quarter, with medians indicating that it will implement 100 basis points of rate cuts in the coming year, which is 75 basis points more than what the Fed is anticipated to do.

Approximately 70% of economists, or 18 out of 26, anticipated that the rate would be at or below 4.0 percent by the end of 2024, which is significantly lower than the anticipated fed funds rate of 4.50 to 4.75 percent.

"The Bank of Canada will be thinking ahead with its policy rate still at 5%...(and) it will basically conclude the hiking cycle has done its job and it needs to start shifting towards a more normal monetary policy setting," according to Robert Hogue, assistant chief economist at RBC.

Regarding development, Desjardins economists were marginally pessimistic compared to their peers, anticipating "a brief, shallow recession in the first half of 2024."

"Accompanying labour market weakness should put downward pressure on inflation and prompt the Bank of Canada to cut the policy rate around of the spring of 2024," the authors stated.

As nearly sixty percent of mortgage holders have yet to renew their loans at higher interest rates, the critical issue is what these anticipated rate cuts mean for the housing market and for those who have eagerly awaited homeownership for years.

A separate survey conducted from November 15-30 among eleven property analysts predicted that average home prices, which increased by more than 50% during the pandemic, would level off in 2024 following a 3.3% decline this year, as opposed to the 2.0% increase predicted in an August survey.

One property market analyst was the only one to predict that purchasing affordability would increase in the coming year. However, seven out of nine respondents predicted that the ratio of homeowners to renters would decline within the next five years.

Despite the announcement of several measures in the most recent Autumn Economic Statement by the government to increase housing supply and assist lenders coping with homeowners at risk due to high interest rates, this remained the case.

Moody's Analytics economist Sebastian Mintah stated that the forthcoming supply will primarily resolve past shortages and not plan for the future.

"As long as robust demographics are anticipated to persist, a robust rate of new construction is required." As builders adopt a more cautious approach, there is a problematic likelihood that new supply will be insufficient.