Deflationary trends created by idling home sales?

Deflationary trends created by idling home sales?

Deflationary trends created by idling home sales? Brokers may have been right all along in suggesting the government has simply been too aggressive in its efforts to slow down the real estate market, with growing speculation among economists that the BoC will soon have to fight deflationary trends, in part fueled by idling home sales.

“The inflation right now is very low and it will stay very low in the coming months,” Benoit Duricher, senior economist for Desjardins Group said to the Canadian Press. “So the Bank of Canada should be worried about that.”

That concern was front and centre for industry players expected to parse every word of Wednesday’s BoC rate update. The bank, as expected, held its Overnight rate at one per cent, although it lowered its forecast for inflation at the same time suggesting the economy is strengthening.

The bank anticipates that economy grew by 1.8 per cent in 2013, but will expand another 2.5 per cent this year.

That may be overly optimistic, say some analysts, given recent comments by the bank’s governor, Stephen Poloz.

“If the U.S. economy is strengthening as we believe, those will be very welcome kinds of market pressures,” Poloz said on CBC’s the Lang and O’Leary Exchange earlier this month. “But it’ll still be up to us what our monitored policy should be, independently of what’s going on in the U.S. and that will depend on where is inflation relative to where we expect it to be. Right now it’s expected to be too low for too long so that’s where we sit.”
 
Many pundits are pointing to the aggressive measures the federal government has taken to rein in a hot housing market as a main contributor to slower-than-expected inflationary growth, which has been held below the two per cent target for 19 consecutive months.

It remains to be seen if the central bank will lower interest rates in a bid to encourage positive inflation.

 
6 Comments
  • Kent Farnsworth 2014-01-22 9:59:50 AM
    This is a somewhat bizarre and unexpected turn of events. One one hand we have Mr. Flaherty still hinting toward further changes to assure a "soft landing", yet the BOC is seriously considering the possibility of decreasing the prime lending rate to make up for the slow down in real estate sales and decrease in property values? Am I understanding this correctly?
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  • Christopher 2014-01-22 10:34:53 AM
    The problem with a slowing housing market and making it harder for first time buyers is all the other parts of the economy it affects; from snow shovels to a second (or first) car.
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  • Frank 2014-01-23 6:15:13 AM
    The Real Estate industry was used to revive the economy during the GFC. This was done through deregulation and collusion between government and banks to facilitate lending which encourage a boom in construction and other indirect beneficiaries. This can only be a temporary measure, a country can't sustain itself by selling each other houses, we need to export and import to be financially healthy. Now that its time to pull back to normal and sustainable levels to avoid an unhealthy dependence in one sector and the some beneficiaries feel they are being treated unfairly. The housing market needed to slow down years ago in order to engineer the fabled "soft landing". It really is too little to late and the slowing economy and overdependence in real estate will become more evident in the future.
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