It appears that Canada's housing market has finally started its recovery phase after a long period of decline. However, the timing of the recovery is not great at all considering high interest rates are expected to slow most of the economy.
So if the housing market of Canada stages a recovery, it would lead to high inflation in Canada. In turn, this would delay the policy shift by the Bank of Canada, according to analysts.
The markets are looking forward to rate cuts by the Bank of Canada after following an aggressive policy. But if the inflation turns higher due to the recovery in housing market, that would disturb everything.
The upturn in the housing market appeared when the central bank of Canada paused its rate hike cycle. For now, the interest rate in Canada is near 4.50% which is a 15 years high!
The BoC believes that inflation will return to 2% if the economic growth remains slow. But we all know that a recovery in the housing market will lead to economic activity that would ultimately push the inflation higher.
According to BMO Capital Markets, the upturn in the housing market is not something that the BoC is too thrilled about! In fact, this would lead to higher inflation as we enter into the 2nd half of 2023.
Greater Toronto Area, which is a populous metropolitan region in Canada has seen a steady rise in the house prices for 3rd month in a row. In addition, the sales have also increased which tells us that this recovery is real.
It appears that the ball is in the court of BoC once again to decide the next action. For now, it appears that the BoC will adopt a wait-and-see approach about the housing market. But if the housing market recovery leads to considerable increase in inflation, the central bank will be forced to take action.