Senior economist lays out the effects of the ongoing battle on Canadian economy and inflation rates
The ongoing Russian-Ukraine conflict has set off a chain of unpleasant events that have rippled out beyond the European region. That begs the question: will its impact extend to Canada’s shores?
A recent note from Sal Guatieri, Senior Economist and Director at BMO Capital Markets, examined how the tensions in the Eastern European region is affecting Canada’s already agitated housing market.
According to Guatieri, the magnitude of the conflict and its influence on the economy, inflation, and interest rates are all factors to consider. As things stand, the conflict is likely to cause more concern about inflation than growth, increasing the risks to the rate outlook. In its interest-rate decision last week, the Bank of Canada indicated that it does not regard the conflict as a deterrent to tightening, and it intends to stick to the normalization path for the rest of the year.
Although Governor Macklem stated that the war's uncertainties require a "careful" approach, any caution will be put to the test if inflation rises above three-decade highs.
The war has further clogged global supply chains and sent numerous commodity prices to multi-year highs, with oil and wheat at 13-year highs, and aluminum at all-time highs, Guatieri added.
Should the crisis continue, further depressing confidence and financial conditions, the impact on the economy could outweigh inflation concerns, prompting a slower rate of tightening. However, Guatieri predicted that the conflict is unlikely to repeat prior crises that only served to bolster the market, such as the 2014 oil price fall and the 2020 pandemic, both of which resulted in rate cuts that fueled the 2016 and current manias.
The housing market won’t see any frenzy caused by the war, Guatieri stated. He pointed out that in January, benchmark prices set new highs on both a yearly and monthly basis (dating back to 2005), and based on the latest city statistics, prices appear to have risen again in February.
In February, benchmark prices in Vancouver soared 20.7 percent year over year and more than 3% seasonally adjusted, with sales 27 percent more than the decade average. Still, this is nothing compared to Toronto, where prices have risen 35.9% year over year and an estimated 4.5% seasonally adjusted.
In many other areas, prices are rising even faster. The oil and commodity-producing provinces of Alberta, Saskatchewan, and Newfoundland and Labrador are among the regional markets that could benefit from increased interest rates.
The Bank of Canada's quarter-point increase this week is a positive first step in shifting market sentiment away from FOMO. Given tight affordability even at present low rates, it won't take many incentives to reduce demand in the costliest portions of the country.
Investors, who are presently the fastest expanding segment of the market, will be the first to pull back. As ownership becomes an increasingly distant fantasy for many potential buyers, they will have little alternative except to rent.
The home market in Canada is now being put to the test for the first time since the latest round of rate hikes and changes to the housing tax and mortgage rules in 2017.
Guatieri foresees that supportive fundamentals such as job development and immigration, will provide a cushion. However, the major danger to the market is if prices continue to defy gravity and climb at unsustainable rates before rate hikes can drag the market down.
