Housing turnaround makes the Bank’s job harder

House prices edged up in March and the sharp rise in the sales-to-new listing ratio suggests there are further gains to come. As the improvement has been driven mainly by a collapse in new listings, while buying power is still constrained by higher mortgage rates, we do not expect prices to increase by anywhere near as much as the sales-to-new listing might suggest. But we have now revised up our house price forecasts, which imply house prices will end the year close to their current level. While the stabilisation of the housing market is good news for the near-term economic outlook, it nevertheless makes the Bank of Canada’s job harder. House prices feed through directly into the CPI, so there will be less downward pressure on inflation from housing than we previously expected. Empirical research also shows that consumers’ inflation expectations tend to be heavily influenced by housing costs, raising the risk that consumers’ short-run inflation expectations will continue to decline only gradually from their still elevated level. All this could prompt the Bank to keep the policy rate unchanged for longer than we expect, with overnight index swaps now pointing to the first interest rate cut in 2024, rather than toward the end of this year as we currently assume.