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TD forecasts B.C.’s housing costs to ease with interest rate cuts on horizon

Bank of Canada held overnight lending rate at 5 per cent, but TD forecasts cuts in 2024
The Bank of Canada kept its overnight lending rate at 5 per cent, but a senior economist with TD forecasts that interest rate cuts are on the horizon, which promise to ease housing costs in B.C. But B.C.’s economy is not predicted to grow as fast as the rest of the country’s. (THE CANADIAN PRESS/Sean Kilpatrick)

Housing costs in British Columbia will continue to rise but at a slower rate as the Bank of Canada is expected to cut its key overnight lending rate later this year.

But B.C.’s economy is also predicted to grow “slightly” slower than the rest of Canada.

That is the assessment of Leslie Preston, TD’s managing director and senior economist, after the Bank of Canada held its overnight lending rate at 5 per cent. But this “as expected” decision in favour of the status quo is preceding predicted cuts down to 3.5 per cent by the fourth quarter of 2024, thereby easing the cost of housing, as the overnight rate sets the pace for mortgage rates.

“We do expect shelter inflation to ease,” Preston said. “But…inflation easing does not mean that prices are coming down.” It means that the year-over-year increase might be two per cent rather than six per cent, as an example. “But for the person out there, they are still paying two per cent more for shelter than a year ago.”

Preston added that TD predicts B.C.’s re-sale housing prices to continue to “slightly” fall in 2024 before picking up again in 2025.

“We do expect homes sales to shift to growth this year,” she said. “We have already seen mortgage rates started to come down in line with lower Government of Canada bond yields,” she said. “But as the Bank of Canada starts cutting rates, we expect mortgage rates to come down further.”

But the story might be different for rental rates. If TD predicts B.C.’s home prices to soften in 2024, rent inflation remains high, Preston added in pointing to passages in the Bank of Canada’s analysis that speak of a structural shortage in housing.

RELATED: All eyes on the BoC this week for hints on when it may cut interest rates

Looking at the broader economy, housing also plays a role in TD’s forecast for the provincial economy.

While the Bank of Canada predicts the Canadian economy to grow by 0.8 per cent in 2024, TD is forecasting Canada’s GDP to grow by 0.5 per cent, contingent on future interest rate cuts. TD’s forecast for B.C. drops to 0.3 per cent before rising to 1.8 per cent in 2025.

“Typically, in recent history, B.C. grows faster than the rest of Canada,” Preston said. But B.C.’s large housing sector relative to the size of its economy is holding back growth, Preston said, pointing to the effects of high interest rates driving costs upwards.

Higher interest rates as a response to inflation have also hurt British Columbians in their personal pocketbooks, a point underscored again by a recent study from Statistics Canada. It found that rising interest rates have actually deepened the wealth gap between people in the high and highest income brackets relative to people the low and lowest brackets.

While higher interest rates can lead to increased borrowing costs for households, they can also lead to higher returns on savings and investments and the study found that rising interest rates have actually benefited high-income earners because they have more investments.

Inflation, meanwhile, has eaten up any investment gains for people at the bottom or very bottom of the income scale. Not surprisingly, their respective net savings have been steadily declining since 2020, while the net savings of the richest and very richest income groups have been steadily rising during the same period.

What asked about this development, Preston said that cuts in interest rates in response to easing inflation are on their way.

“But when you are talking about that portion of the income scale, those are also households, who are very adversely affected by inflation,” Preston said.

“There is less room in their budgets when food prices (over 20 per cent over the last two years) are up — that’s hitting those households very hard,” she said. “The main reason why the Bank of Canada is keeping interest rates elevated is to really bring down those rates of inflation, which will help households across the income spectrum, even more so at more modest incomes to bring inflation down back to (a) target (of two per cent).”

Over time, this means that people’s purchasing power will erode less, she said.

Finance Minister Katrine Conroy said global inflation and interest rates represent big challenges for British Columbians, squeezing their budgets.

“High interest rates are especially difficult for people who have a variable rate mortgage or are having to renew their mortgage, people who have car loans or lines of credit, and businesses seeing higher borrowing costs,” she said. “For all these reasons, Premier Eby and our team thought it was critically important to go on the record, to point out to the Bank of Canada that rising interest rates are hurting people in B.C. We are pleased the Bank of Canada did not increase interest rates this January.”

She added government will continue to look for new ways to help people with costs.


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Wolf Depner

About the Author: Wolf Depner

I joined the national team with Black Press Media in 2023 from the Peninsula News Review, where I had reported on Vancouver Island's Saanich Peninsula since 2019.
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