Written by

Written on January 12th, 2023

There is no crystal ball that will give us answers to what lies ahead (for the housing market) given that the unprecedented rate hikes in 2022 were spurred on by a pandemic, war, and oil shock (all at once).  The question is are we done yet?  No one truly knows.  But if history can teach us a thing or two then let’s consider the following as food for thought:

Inflation is the primary influencer on interest rates.  BMO Capital Markets recently shared a graph showing US inflation in the past 5 years following an eerily similar pattern from 50 years ago (see graph below).  Blue line is US inflation the last 5 years and the red line is inflation from the 1970s.  “….it is uncanny how closely inflation in the current episode is tracking the experience of almost 50 years ago,” said BMO.

Rob McLister from Mortgagelogic.news wrote, “and maybe even more unnerving is the consensus forecast would almost precisely fit the red line for the next two years… The late 1970s inflation revival is not lost on today’s central bankers.  They learned painful lessons that decade, the most important being: never take your foot off the brake early when slowing the economy.  And never underestimate a resurgence in inflation.  Those lessons are precisely why we’re likely months away from being done with rate hikes – at least on the US side of the border.”

Considering “Canadian inflation has almost a 90% correlation with American inflation,” this could be a preview to what we could experience in Canada as well.

Just be prepared for another (perhaps final) 0.25% rate increase by the Bank of Canada on January 25th though as financial markets have implied a 59% chance of this happening.

What about prices then?  TD Bank reaffirmed its previous forecast that average home prices in Canada could hit bottom in early 2023 (see graph below) which it says will be consistent with the end of Canada’s monetary tightening cycle (ie. rate hikes).

So if you trust using both the history of 1970s inflation in the US and TD Bank’s forecast of average home prices as forward guidance then early 2023 could be when we will see things begin to turn around.  That does not mean interest rates will go down, but rather it could begin to stabilize (and stay elevated until 2024 before rate cuts could begin).   The same could be said about TD’s average prices forecast.  But then again, disclaimer alert!  No one has a crystal ball and all of this could be entirely off base as new economic data becomes available each month requiring economists around the world to modify their forecasts accordingly (again).