Scotiabank Urges Rate Hike as Canadian Housing Frenzy Heats Up Again

© Reuters.

By Ketki Saxena

Investing.com -- Analysts at Scotiabank (TSX:BNS) have once again raised concerns over the nation's real estate market, warning that unchecked growth could have severe consequences for the economy and calling for the Bank of Canada (BoC) must increase interest rates soon to prevent further escalation in both property prices and inflation. 

"The BoC should definitely pay attention to housing, whatever others think," argues Derek Holt, head of Capital Markets Economics at Scotiabank.

The primary goal of the Bank of Canada is maintaining stable inflation levels. While housing should not typically influence their decisions, it has played a significant role in driving up demand for real estate across the country. The central bank's decision to pause rate hikes due to high household debt loads has led investors to view the market as safeguarded by authorities, sparking another wave of activity.

Shelter costs, including rent and mortgage payments, directly contribute to the Consumer Price Index (CPI). Although current measures may lag behind reality, there's no denying that they play an essential role in fueling inflation - which appears to be reigniting once again. As shelter costs soar, consumer spending shifts away from other sectors – dealing a blow to various industries while increasing dependency on housing.

Holt points out that while Governor Tiff Macklem hinted at an expected rebound in housing during H2 2021 back in April, data already shows this trend taking place with remarkable speed. Seasonally adjusted monthly growth figures reveal a surge in home sales throughout April (+27% Toronto; +24% Vancouver), followed by even more robust numbers in May - all fueled by decreasing interest costs.

"Some folks won't like this but in my professional opinion Canada needs monetary policy and macropru[dential] tools to further tighten the screws," he argues.

According to Holt, the BoC must address housing concerns by raising interest rates at least once more. 

"The stability risks of allowing this [real estate surge]to get out of hand once more outweigh the downside risks that an over-leveraged minority tail of households pose to the outlook"