Concerns have arisen that there could be a housing-led recession in Canada if interest rates continue to increase. Some experts believe there could be a rapid correction in the property market that could lead to a recession. The warning comes from an economist at Capital Economics after the Bank of Canada raised interest rates by 50 basis points at the start of June.
Senior economist, Stephen Brown, said that the Bank of Canada had adopted a ‘hawkish’ tone on inflation and that this could have a massive impact on the housing market. He added that the central bank did not appear to have any concerns about the fact that there had been a double-digit drop in property sales throughout May, the second such drop in a row.
He said, “This raises the chance of the bank enacting a larger interest rate hike at its meeting in July and leaves us concerned that it will take a more aggressive approach to policy tightening than is ultimately required, driving house prices sharply lower and risking a major recession.”
Sharp drop in home sales seen in April and May
Figures show sharp drops in property sales nationwide in both April and May. In April, Canada saw a 14% month-on-month drop in home sales, while in May, there was a 12% month-on-month fall.
The data also highlighted the falling sales to new listing ratio in several key areas, including Vancouver, Toronto, Montreal, and Calgary, with implications that this could take house price inflation from 18% in April to zero by the end of 2022.
Furthermore, the report from Capital Economics showed that property prices were already falling with a nationwide month-on-month drop of 0.6%. In Toronto, property prices fell at an even faster pace experiencing a decline of more than 3% in May for the second consecutive month.
Referring to the central bank’s interest rate hike in June, Mr. Brown said little reference had been made to the housing sector in the bank’s statement. However, it was noted that there might be more in-depth discussions about the moderating property market when the bank delivers its 2022 Financial System Review this week.