Bank of Canada’s Policy Shift Could Reinvigorate Canadian Real Estate Market by Spring: BMO Analysis

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In a recent report, BMO suggests that the Bank of Canada’s (BoC) impending policy shift may rejuvenate the Canadian real estate market by spring, reigniting buyer exuberance. Canadian homebuyers, particularly investors, have been closely monitoring the BoC’s announcements, with their sentiments and price growth expectations significantly influenced by the central bank’s decisions. Robert Kavcic, a senior economist at BMO, emphasizes the pivotal role of psychology in the housing cycle, from the era of prolonged low rates to the recent reality of aggressive rate hikes.

Historical survey data from Bloomberg/Nanos corroborates this view, showing a clear correlation between BoC announcements and shifts in market expectations. When the BoC announced cuts, expectations tilted towards rising prices, and conversely, hikes aligned with a decline in positive sentiment. This pattern has been especially pronounced over the past year, illustrating a sentiment-driven market that responds rapidly to monetary policy changes, quicker than the typical 18 to 24 months for a rate decision’s full impact to materialize.

As the current tightening cycle concludes, household expectations for rising home prices are increasing. Kavcic points out that the general assumption of this cycle’s end is a significant behavioural milestone, allowing buyers to plan with a clearer understanding of the ‘worst case scenario’ regarding interest rates. Further fueling this optimism is the speculation of potential rate cuts this year, a scenario that could substantially enhance market psychology.

However, Kavcic notes that historically, rate cuts have typically followed job losses and haven’t led to immediate price increases, except for the exceptional case in 2020. With the Canadian labour market showing resilience, a notable uptick in market activity could be on the horizon this spring. Yet, it remains uncertain whether this resurgence will be substantial enough to drive home prices higher.

This analysis by BMO underscores the intricate connection between central bank policies, market psychology, and real estate dynamics in Canada as the market anticipates the BoC’s next moves, the potential for a springtime revival in the real estate sector looms, marking a critical juncture for both investors and homebuyers.

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