BMO Economics says Russia-Ukraine war has Canadian housing “caught in crossfire”

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      You may be wondering how the war between Russia and NATO-backed Ukraine is going to affect the housing market in Canada.

      BMO Economics has this covered.

      Sal Guatieri, a senior economist and director at BMO Capital Markets, looked at the issue, and released an analysis titled “Canadian Housing: Caught in the Crossfire”.

      The short take is that the war is not good for Canadian real estate.

      That is, if you’re the sort who’s hoping that the market will get even hotter than it is.

      Guatieri wrote in his March 4 paper that the “war is unlikely to echo previous crises that only ended up juicing the market”.

      He cited the 2014 oil price crash, and the 2020 COVID-19 pandemic.

      In both situations, the BMO economist recalled that the crises “led to rate cuts that stoked the 2016 and current mania”.

      “As things stand, the conflict is expected to raise more concern about inflation than growth, heightening risks to the rate outlook,” Guatieri noted.

      In simple terms, if there was any chance that the Bank of Canada will slow down its anticipated 2022 to 2023 series of increases in its interest-setting rates that will make mortgages more expensive, that possibility has likely evaporated.

      “The Bank of Canada doesn’t see the war as an obstacle to tightening, as it pulled the trigger this week, and it plans to hold tight to the normalization path for the year,” Guatieri stated.

      The BMO economist was referring to the March 2 announcement by the central bank of a 0.25 percent increase, hiking its rate to 0.5 percent.

      To explain, raising the interest rate is a way of reining in inflation or the growth in prices of goods and services.

      Inflation in Canada stood at 5.1 percent in January, which is way higher than the Bank of Canada’s target of two percent.

      In its March 2 rate announcement, the central bank stated that the conflict in Ukraine is “putting further upward pressure on prices for both energy and food-related commodities”.

      “All told, inflation is now expected to be higher in the near term than projected in January,” the Bank of Canada stated.

      For Guatieri, the market is hot enough to begin with.

      “In fact, it’s hard to see the housing market becoming more feverish than it is now,” the economist wrote.

      He noted that “benchmark prices posted record gains (going back to 2005) on both a yearly and monthly basis in January, and prices look to have accelerated again in February based on the latest city reports”.

      In the Greater Vancouver market, the benchmark composite price or the typical price of all types of homes combined increased to $1,313,400 in February 2022.

      This represents a 20.7 per cent increase over February 2021, and a 4.6 percent more than January 2022.

      In January 2022, the benchmark composite price in Greater Vancouver was $1,255,200.

      This price marks an 18.5 percent increase over January 2021, and a two percent addition to December 2021.

      Moreover, Guatieri noted that the February 2022 increase in Greater Vancouver is “pedestrian compared with Toronto”.

      In Toronto, the price soared 35.9 percent year-over-year in February.

      “To put the latter figure in perspective, in a balanced market, house prices would normally rise more or less alongside family income—which rarely grows 4.5% in an entire year let alone a single month,” Guatieri wrote.

      It was on February 24 that Russian President Vladimir Putin announced a “special military operation” in Ukraine.

      While rising interest rates may slow down the market in big markets like Greater Vancouver and Toronto, the BMO economist suggested that some regional markets may “come out ahead even in a rising interest rate climate”.

      These are the “energy and commodity producing provinces of Alberta, Saskatchewan, and Newfoundland and Labrador”.

      “Not only have they largely avoided the pandemic explosion in house prices, and thus remain highly affordable and likely to withstand higher rates, they stand to benefit from the soaring price of oil, natural gas, wheat and potash,” Guatieri stated.

      He cited Calgary as an example, where home resales “hit a record high for the month of February, and benchmark prices blasted nearly 6% higher in the month and 16.1% in the past year”.

      With interest rates starting to rise amid the backdrop of the Russia-Ukraine war, Guatieri suggesed that Canada’s housing market “now faces its biggest test” in recent years.

      “Investors, now the fastest growing share of buyers, will be the first to back off,” the economist wrote.

      Meanwhile, elevated housing prices will continue to pose affordability problems.

      “Many potential buyers will have little choice but to rent as ownership becomes an ever-distant dream,” Guatieri stated.

      The Bank of Canada is scheduled to make its next announcement about its interest-setting rate on April 13, 2022.

      Guatieri wrote that while central bank Governor Tiff Macklem has said that the “uncertainty caused by the war warrants a ‘careful’ approach, any caution will be sorely tested if inflation pushes further beyond three-decade highs”.

      “By further snarling global supply chains and sending many commodity prices to multi-year highs (oil and wheat at 13-year peaks and aluminum at all-time highs), the war is an unwelcome guest at the inflation table,” the BMO economist stated.

      “The Governor isn’t ruling out the possibility of launching a 50-bp missile if needed,” Guatieri added, referring to the likelihood of a 0.5 percent rate increase in the immediate horizon.

      But like any good economist, Guatieri provided a second scenario for such a complex situation like the war in Europe.

      “If the conflict escalates and ultimately depresses confidence and financial conditions further, the hit to the economy could dominate concerns about inflation, spurring a slower tightening cadence,” Guatieri qualified.