The world and Canada’s economic and interest rate landscape has changed significantly since the publication of our latest Housing Market Outlook (April 2022) and subsequently, The road ahead for the economy and housing (July 2022).
Deputy Chief Economist
As Deputy Chief Economist, Patrick Perrier is part of a team of housing economists and researchers striving to improve Canada’s understanding of drivers and barriers in housing markets and how they impact affordability. Patrick is also part of a diverse national team of researchers and analysts investigating barriers to housing supply and potential solutions.
- Inflationary pressures have been stronger and more persistent than expected since we published our Housing Market Outlook in April 2022.
- This has led to significantly sharper than predicted interest rate hikes in Canada and other economies. Interest rates are expected to rise further given the need to reduce inflation.
- The Canadian economy will enter a modest recession by the end of 2022 and start recovering in the second half of 2023.
- The national house price is expected to decline by close to 15% by Q2 2023 from its historical peak in Q1 2022 as housing demand slows with rising interest rates and deteriorating economic and income conditions.
- Despite this house price decline, ownership affordability will not improve as the benefit from lower prices will be offset by rising interest rates. Rental affordability pressures will increase with rental demand as fewer renter households can access ownership.
Economic and interest rate landscape and outlook
Forecasters — including CMHC — were expecting an orderly elimination of excess economic capacities2 from the sharp economic downturn in the early months of the pandemic and a gradual rise in interest rates as central banks aimed to keep inflation under control.
Since then, inflation has risen more than expected and far exceeded targeted rates in several inflation-targeting economies, including Canada. The war in Ukraine and the resurgence of COVID-19 infections in China contributed to increasing energy and food prices. These factors have also prolonged the global supply-chain disruptions that were initially caused by the pandemic.
As demand continued to grow with the pandemic-related recovery, the global and Canadian economies have witnessed more demand and inflation pressures so far in 2022 than expected last spring.
In Canada, the annual inflation rate — or rate of increase — in the all-items Consumer Price Index (CPI) was 8.1% in June. This increase is a near 4-decade high and declined to 7% in August, mostly due to decreasing energy prices over this period.
Despite this decline, our view is that inflationary pressures have not eased as the average of the Bank of Canada’s 3 indicators of trend inflation — which better reflect economic imbalances — have remained unchanged since June.3
This strong and persistent inflation landscape led to a sharper-than-predicted rise in monetary policy and other interest rates so far in 2022. From March 2 to June 2022, the Bank of Canada raised its policy rate from 0.25 to 1.5% and applied 2 additional hikes thereafter to bring this rate to 3.25% on September 7. We predict this policy rate will continue rising and peak at 4% by the end of this year.
This policy rate rise is also increasing households’ and businesses’ borrowing rates. As inflation converges back to its target range by mid-2024, the Bank of Canada policy rate will also decline and stabilize at 2.5%, the mid-point of its estimate for the neutral policy rate.4 Other interest rates will broadly mimic the policy rate over our forecast horizon to 2024 (see chart 1).