Residential Market Commentary - Housing concerns moderate at BoC

A consistent concern as the Bank of Canada embarks on its interest rate cutting cycle has been what will happen to home prices.  There have been persistent fears that prices will spike as rates fall, effectively stalling efforts to bring down inflation.  The Bank of Canada, however, is not overly worried about it, according to the governing council’s latest Summary of Deliberations.

The central bankers are paying close attention to the housing market but their worries about pent-up demand driving prices higher as interest rates drop have eased.  They do acknowledge that declining mortgage rates and higher-than-expected population growth “could add to demand.”  But there is also a feeling that “housing affordability challenges could have played a greater-than-expected role in dampening demand” and that delays in building homes could limit the growth of supply.

So far, housing market reaction to the rate cuts that have been made is mild.  There have been some upticks in sales and in new listings.  The Bank of Canada’s trend-setting policy rate is currently 4.50%.

A number of market watchers have commented that the Bank of Canada seems satisfied with the progress that is being made to bring inflation back to its 2.0% target.  The Consumer Price Index puts headline inflation at 2.7%.  The analysts suggest the Bank is now shifting its focus away from inflation and toward maintaining economic growth and avoiding a recession.

The Bank’s next interest rate announcement is set for September 4th.