Canada’s economy has gotten off to a bumpy start in 2018, with GDP growth slumping 0.1% in January after a red-hot 2017. How much of a role does the Canadian housing market have to play in the cooling period? Quite a large one, according to several economists.
Foreign buyer taxes in Toronto and Vancouver, a new mortgage stress test for uninsured buyers, and an interest rate hike have all taken their toll on the market, leading to a massive 14.5% drop in national home sales in January.
Where will things go from here? To find out, BuzzBuzzNews has rounded up the latest in economic commentary, to keep you informed about what to expect next.
Inflation is creeping upwards
Canada’s annual pace of inflation jumped up in February, surprising economists who had expected it to remain quite a bit lower. The cause of the boost? You guessed it — the housing market.
“There are the uncertain drivers stemming from housing market developments [to consider],” writes Scotiabank VP and head of capital markets economics Derek Holt, in a recent note. “New home price gains peaked in the middle of last year…before pulling back…in January of this year.”
The inflation rate currently sits at 2.2%, while the Bank of Canada’s target inflation rate is 2%.
According to Holt, if home prices continue to fall, it could affect other related industries, and push the inflation rate even higher.
The economy’s not doing so hot
Canada’s GDP contracted 0.1% in January, marking its worth monthly performance since 2015. The reason for the contraction? Slumping manufacturing sales and the drop in January home sales.
“Don’t look to the housing market to carry the team,” writes BMO senior economist Sal Guatieri, in a note about what to expect for the Canadian economy in 2018. “It still needs to work off the speculative fervour that gripped much of Southern Ontario a year ago.”
But both home sales and GDP growth are expected to climb later in the year, once the market has adjusted to the mortgage stress test and interest rate hike.
That means that, while there won’t be a huge rebound in GDP growth next month, things will look a little less dramatic.
Canada’s global competitiveness could be in jeopardy
According to RBC Global Asset Management chief economist Eric Lascelles, all of this uncertainty could affect Canada’s global economic standing.
“Canadian competitiveness is deteriorating quickly,” he wrote this week. “The Canadian dollar should soften further in the coming year as a partial offset to this competitive shortfall.”
Lascelles writes that a cooling housing market poses a serious headwind for the Canadian economy.
“The possibility of a more intense Canadian housing slowdown [poses a problem,]” he writes. “The risk would seem to be elevated given the rapid rise of household debt in Canada in recent years and poor affordability.”
He notes that Canadians should get used to a slower economy, as the housing market likely won’t be there to prop it up.
“At a minimum it seems unlikely that housing will be able to continue driving growth artificially higher over the next decade in the way that it did over the past 10 years,” he writes.
How Much Will the Housing Market Affect the Canadian Economy This Year? by Sarah Niedoba | Buzz Buzz Home