Photo: James Bombales

For years, the Canadian housing market has been a boon to its economy, as red hot housing prices pushed GDP growth to record heights. But now that the market has entered an extended cooling phase, how will the economy respond?

It’s not the doom-and-gloom scenario you might expect, according to several industry experts who spoke with Livabl this week. For a closer look at how the housing market could affect the economy in the coming months, read on for the latest commentary to keep you in the know.

GDP is doing just fine…

Canada’s GDP jumped 0.5 per cent in May, beating most economists’ forecasts, and bringing second quarter growth to 3 per cent in annualised terms. One thing that didn’t add to the positive reading? Canada’s housing market.

“While the real estate sector as a whole recorded a rise in output, declining home sales in Vancouver weighed on real estate agents and brokers’ commissions, which dropped 2.7 per cent, the fourth monthly fall this year,” writes Capital Economics senior Canada economist Stephen Brown, in a recent note.

Overall, while Brown says there are still concerns over Canada’s still-stabilizing housing market, it’s good news that slumping sales didn’t have much of an impact on the country’s economy in May.

“Definitely, I don’t think we’re out of the woods yet when it comes to the housing market,” he told Livabl. “But I do think it is certainly positive that we saw GDP growth month-over-month in May, despite a dip in commissions.”

…And so are the banks

Earlier this year, CIBC predicted that the number of new mortgages it would grant in the second half of 2018 would be cut by 50 per cent, as a new mortgage stress test dissuaded buyers from entering the housing market.

But according to a new report from CIBC World Markets, even if that prediction comes to pass, it likely won’t affect Canada’s big banks all that much.

If the banks stopped expanding their mortgage portfolios entirely, their future profits would drop by just 1 per cent, writes CIBC analyst Robert Sedran, in a recent report.

“We view slowing mortgage growth as a very manageable headwind,” he writes.

Sedran argues that investors are too prone to focus on what could go wrong in the economy, rather than what is going right, and says that mortgage profits make up a relatively small part of Canadian banks expansion efforts.

But inflation could affect interest rates

Canada’s annual inflation rate rose to 2.5 per cent last month, boosted by consumer prices which grew at their fastest pace in six years.
The boost follows a 2.2 per cent reading in May, as energy prices and mortgage interest costs pushed the figure higher.

What could the rise mean for the Canadian housing market? Well, the Bank of Canada (BoC) watches the rate very closely, and attempts to keep it between one and three per cent through — you guessed it — interest rate hikes.

“We’re in a rising interest rate environment, and that affects affordability, what buyers are able to purchase,” Canadian Real Estate Association chief economist Gregory Klump told Livabl. “So we’ll have to see what effect that has on the market in the coming months.”

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