In episode 83 of the Canadian Real Estate Investor podcast, hosts Daniel Foch and Nick Hill discuss the latest monetary policy report from the Bank of Canada and its impact on real estate investing.
Foch and Hill that while global inflation is decreasing, core inflation in major economies remains persistent. As a result, central banks are expected to continue to maintain restrictive monetary policies to achieve their inflation targets. This is anticipated to constrain global growth through 2023 and the first half of 2024, with growth projected to pick up in 2025 as the effects of policy tightening fade.
Turning to Canada specifically, the hosts note that consumer price index (CPI) inflation is expected to come down quickly to around 3.0 per cent in the middle of 2023 and then decline more gradually, reaching the 2.0 per cent target by the end of 2024.
Goods price inflation is easing quickly due to lower energy prices, improved global supply chains, and the effects of restrictive monetary policy on interest rate-sensitive sectors. However, the pair explains services price inflation is responding more slowly to the effects of restrictive monetary policy, which is why inflation is forecast to return more gradually to the 2.0 per cent target.
The hosts dive deeper into the report’s analysis of mortgage rates and housing. They note that the Bank of Canada expects household spending to be restrained by higher interest rates, with the share of income spent on interest payments continuing to rise as homeowners renew their mortgages. This is expected to have a particular impact on highly indebted households, more vulnerable to increases in borrowing costs.
This could lead to a slowdown in housing demand, Foch and Hill explain, particularly for higher-priced properties, as potential buyers are priced out of the market.
Despite this, the hosts note that Canadians are continuing to choose mortgages with shorter amortization periods and variable rates, which can offer more flexibility and potentially lower costs over the long term. They also point out that Canadians are spending the highest percentage of their disposable income on mortgages since the late 1990s, which could indicate a high level of confidence in the housing market despite the potential risks of rising interest rates.
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