The Bank of Canada Pivots. What is Means for the Housing Industry.

A funny thing happened on the way to normal. Economists call it a pivot. And it will help Canada's housing industry.

“The Bank of Canada Governing Council judges that the economic outlook continues to warrant a policy interest rate that is below the neutral range.”

The Central Bank announced today that it would hold its key bank rate at 1.75%. That is very low by historical standards. This means that Canadian monetary policy remains in the zone designed to stimulate the economy.

Way back in time - think 2017/18 - the BOC was hell-bent on returning us to low-normal rates in order to head-off the scourge of inflation. The bank is now signaling that we are in for an extended period of very low rates instead, which of course is supportive of real estate market activity, being a very interest rate-sensitive industry.

(why is the Bank of Canada so worried about inflation? Significant inflation, for you Millennials who have never experienced it, is a terrifying thing. Every paycheck is worth less than the previous one; the real value of savings shrivel; mortgage rates skyrocket and eventually the economy is driven into a deep, dark recession).

The bank’s pivot back to stimulus policy was necessary because the economy has slowed considerably. Canadian growth in 2017 led the G7 at nearly 3%. In 2018 we slipped to only +1.8%.

Why? The housing market for one. Despite healthy levels of activity and price growth in Atlantic Canada, Quebec, Ontario outside of Toronto and Manitoba, things were very quiet last year in Toronto, Vancouver and Calgary. And those cities account for a lot of housing activity.

You can blame the B.C. government, or the federal mortgage stress test, and they certainly contributed, but the real culprit is simply overshooting. You can’t have prices rising by 20% for long when home buyer’s incomes are rising by 2%. We had a few years of excess; now markets are correcting.

And then there are the major economic influences that are completely out of our control. Weak global oil markets hurt every province in Canada, not just Alberta, Saskatchewan and Newfoundland.

And finally, US President Trump’s global trade wars have hurt economies around the world, including America itself. His policies are increasingly being compared to the 1930 Smoot-Hawley tariffs blamed for triggering the Great Depression.

Economists from the Federal Reserve Bank of New York, Princeton University and Columbia University released a study this week showing that the tariffs imposed last year by Trump were being borne primarily by American consumers in the form of higher prices. The new taxes on products were ranging from washing machines and $25 billion in Canadian steel and aluminum trade, to some $250 billion in Chinese imports, were costing U.S. companies and consumers more than $3 billion a month.