Canada’s central bank sees the economy getting a big boost from falling rates. The latest Bank of Canada (BoC) forecast shows real gross domestic product (GDP) rising sharply next year. Falling rates are expected to drive a big jump in housing investment, boosting real GDP. Not surprising, most of the real estate industry also expects the same. What is surprising is how dependent the BoC forecast depends on housing. To hit their forecast, housing will have to contribute GDP growth similar to the record demand sparked by the investor boom during the 2021 low-rate frenzy. The expectations are lofty, to say the least.
Canadian GDP Expected To See Growth Accelerate On Cheaper Credit
Canada’s economy is expected to get a big boost from monetary easing. The BoC’s latest forecast shows 1.2% annual growth for real GDP for this year, nearly a third of the global forecast. With the monetary easing and population slowdown, they see annual growth rising to 2.1% by next year. Where their forecast anticipates this growth is even more surprising than many will assume.
The BoC GDP Forecast Requires A Housing Frenzy Similar To 2021
The central bank’s real GDP forecast doesn’t just require housing to pick up. Their forecast shows housing contributing 0.5 points of annual real GDP growth—nearly a quarter (24%) of the total. Back in 2021, historically low rates led to record real estate activity and housing contributed 28% of total real GDP growth. They aren’t expecting a boom. They’re forecasting rate cuts will drive relative demand close to one of the frothiest markets in history.
For context, their latest forecast shows housing contributing 0% to 2024 real GDP growth. It’s easy to dismiss it as a slow year, but it’s similar to the contribution made in 2019 (0 points), and just a little higher than 2018 (-0.1 points). Few would consider housing under-contributing to the economy in those years. Back then, real GDP was nearly 2x more dependent on housing than the US was during its housing bubble that led to the Great Recession.
Most, including the central bank, considered the economy overly dependent on housing back then. A 0-point contribution to real GDP isn’t as small as it sounds—it implies the overallocation managed to keep up with inflation. An overallocation that holds steady is still an overallocation, carrying risk instead of mitigating it.
The Bank of Canada Tried Nothing & Now It’s All Out of Ideas
This isn’t Tiff’s first rodeo; he’s hoping to score a deuce. At the start of 2021, the Governor told reporters the growth was “needed” when asked about the overheating housing market. It followed with record sales and price growth, with a population growing at a third of the rate it advanced last year. It was a stark change in position from when he served as the deputy governor and warned that Canada’s economy was drumroll, overly dependent on housing. Now that he’s in charge, he doesn’t see any other path to growth.
There’s a small note to consider before buying a cashflow negative condo and quitting your job to live off the equity ahead of the central bank’s forecast. Their forecast for 2024 was similar on the assumption that rate cuts would drive investors back into the market for a frenzy. The BoC isn’t forecasting so much as it’s hoping to craft a narrative and set expectations. Unfortunately motivating buyers to actually purchase homes is a little harder than having the central bank’s progress boosted by a change in methodology.
English (US) · 