Exuberant Canadians are hooked on real estate, and consequently are following the central bank unusually close. A new report from BMO shows households have shifted price growth expectations with Bank of Canada (BoC) announcements. As the rate tightening cycle comes to an end, the bank sees the potential for the next round of central bank statements to revive the market this Spring. 

Home Price Expectations Linked To BoC Announcements 

Canadian homebuyers, especially investors, have been hooked on the BoC’s words. “There’s no question that psychology has played a major role in this housing cycle, from the days of ‘rates will remain low for a long time’, to the crushing reality of aggressive rate hikes,” notes Robert Kavcic, a senior economist at BMO. 

He reinforces his point with historical survey data from Bloomberg/Nanos. The net difference in respondents expecting price gains vs those expecting losses, is almost too perfect post-2020. As the central bank announced cuts, the net flow of expectations shifted towards higher prices. Similarly, the BoC hikes line up with erosions in expectations.  

“The latest turns have come as the Bank restarted the tightening cycle after an early-2023 pause (sentiment deteriorated with renewed rate hikes),” he explains.

Over the past year, the shift has been particularly telling of a sentiment-driven economy. Central bank research shows it takes between 18 and 24 months for the full impact of a rate decision to hit the market. The rapid swing in sentiment almost immediately after, indicates this is a game of expectations. 

Tightening Cycle Is Over, Expectations Are Rising

The latest results of the Bloomberg/Nanos survey show the curse is far from broken. Households once again expect home prices to rise as the end of the rate hikes are forecast. 

“Now, it is widely assumed that this tightening cycle is over which, from a behavioral perspective, is an important milestone—buyers now know the ‘worst case scenario’ with respect to rates and can plan accordingly,” he says. 

Adding, “At the same time, markets/the Twitterverse/real estate talk shows are pricing in rate cuts this year, which would no doubt go an even more important step further toward improving market psychology.” 

Historically, rate cuts occur after job losses—not ahead of them, like we saw in 2020. Rapid population growth is also not something that occurs in a stagnating economy, since rising demand typically creates inflation. Consequently, rate cuts prior to 2020 haven’t had such a rapid transmission to prices. 

If the labor market continues to demonstrate some resilience, Kavcic believes the Spring could see a notable bounce in market activity. Whether it’s enough to drive home prices higher isn’t yet clear.

Better Dwelling (January 10,2024)