Introduction

In a crucial move for the Canadian economy, the Bank of Canada has implemented a series of interest rate cuts that some economists argue may have prevented a catastrophic collapse of the housing market. Carl Gomez, chief economist at CoStar Group Inc., a leading real estate analytics company, shared his insights during an interview with the Financial Post this week.

Impact of Rate Cuts on the Housing Market

Gomez stated, “The housing market just chugs along. The rate cuts are rescuing it from implosion, but it’s not necessarily going to take off again.” He pointed out that while current mortgage rates have seen slight reductions, they have not returned to the historically low levels that prevailed over the last decade. He further underscored that although the housing market is poised for revival, it will unlikely experience the explosive growth seen previously.

Current Economic Landscape

As of now, the Bank of Canada's policy rate stands at 3.75%, following four consecutive cuts this year. However, Gomez emphasized that long-term bond yields, which influence mortgage rates, have remained stagnant at approximately 3.5%. This indicates that, despite the Bank's efforts to stimulate the market, the impact may be limited due to broader market forces.

Economic Projections for 2025

In an outlook for 2025, CoStar highlighted the current weakness of Canada’s economy, which is reportedly growing at rates below its potential output. Gomez elucidated that when adjusting the country’s GDP growth by population, Canada has effectively been in a recession for nearly two years. He predicts a modest growth rate of 1.4% for the upcoming year, but cautions that this could be compromised by significant risks such as potential trade disruptions linked to U.S. policies and the Canadian government’s recent reductions in immigration targets, which may lead to negative population growth.

Consumer Confidence and Spending

Consumer confidence remains fragile with households adopting a “bunker” mentality, leading to uncertainty regarding a rebound in consumption. Gomez noted that consumer spending accounts for a whopping 60 to 70% of the economy, indicating any dampening effect on spending could have serious repercussions, despite the easing of mortgage renewal pressures.

Labor Market Challenges

Looking at the labor market, the forecast suggests that increased unemployment could correlate with rising mortgage arrears, as job losses will likely hinder household capacity to maintain mortgage payments. Furthermore, Gomez noted that Canada has entered a deflationary period, with inflation rates hovering around 0.85% when excluding shelter costs from the calculations.

Monetary Policy Recommendations

As discussions on monetary policy continue, Gomez believes the Bank of Canada should pursue further rate cuts to more neutral levels around 2.5%. “With inflation at target, the policy rate should be more at a neutral level,” he argued, advocating for proactive measures to safeguard the economy against potential downturns.

Conclusion

In summary, while recent rate cuts have provided a temporary reprieve for Canada’s housing market, underlying economic challenges remain, highlighting the need for continued vigilance and strategic monetary policy decisions in the coming years.