No crash in store for Canadian housing market: Scotiabank

A slowdown in Canada’s housing market will continue through 2013 and years of stagnation may follow, but no crash is likely because demographic trends will support demand in the medium term, a report by Scotiabank said on Monday.  The report by Canada’s third-largest bank said that home sales have already dropped more than 10% from spring 2012, with prices leveling off but not yet falling except in particularly hard-hit markets.

Housing, which slowed but did not crash as a result of the global financial crisis, helped sustain Canada’s economy through much of 2010 to 2012 but is now starting to slide just as the U.S. housing sector has begun a clear recovery.

Scotiabank said the housing slowdown will trim a quarter of a percentage point from Canada’s economic growth in 2013 and 2014, while the U.S. housing recovery is adding half a percentage point to annual growth rates there.

While Canadian home sales may continue to slump, the report said, prices will likely remain above year-ago levels until at least the second half of 2013, and will not drop as dramatically as they did in the United States.

Bank of Canada keeps rate unchanged

As expected, the Bank of Canada left its benchmark overnight rate unchanged at 1.00%.  The Bank described the global economic outlook as “broadly consistent” with its projection. The recent sequestration cuts in the U.S. were cited as a factor making the fiscal drag on the U.S. more front-loaded, but still in-line with its two year outlook for the U.S. economy.

On the domestic front, the Bank recognized the continued slack in the Canadian economy with the weak Q4 GDP reading and current soft inflation environment, but “expects growth in Canada to pick up through 2013, supported by modest growth in household spending combined with a recovery in exports and solid business investment.”  The outlook for inflation was subdued, with core and CPI inflation expected to remain at their current low levels in the “near term, before rising gradually to reach 2 per cent over the projection horizon”  The Bank also recognized the healthier evolution of household credit and expects further moderation in this regard.

Key Implications

Given the current economic environment – both globally and domestically – today’s interest rate decision came in as expected.  The Bank highlighted the soft numbers that were recorded in recent months. Indeed, Q4 real GDP (+0.6% annualized) released last week point to the economy currently running in neutral to finish 2012. The weak hand-off from December (-0.2%, m/m) also means that 2013 will not have a rolling start either. These readings suggest that there exists downside risk to the Bank’s 2.3% real GDP forecast in 2013Q1.

Persistent weakness in inflation – January’s reading marked the tenth consecutive month that inflation has come in below the Bank’s 2.0% target – also points to the Bank remaining on the sidelines until 2014 when it comes to interest rate moves.