MNI: Trudeau Told Falling Prices To Hurt Homebuilding-Briefing

Canadian Prime Minister Justin Trudeau was briefed in July that home construction will likely slow as a slump in prices reduces builder profitability, according to a document obtained by MNI, suggesting one of his key economic pledges will be even harder to reach.

Higher mortgage rates following hikes by the Bank of Canada have been a notable factor slowing the housing market, according to the three-page memo sent to Trudeau and provided to MNI overnight Thursday in response to a freedom of information request. The document is dated July 18, less than a week after the Bank hiked rates a full percentage point in its biggest such move since 1998, which brought the total increase since the start of the year to 2.25 percentage points.

"Housing market activity is expected to remain weak in the coming months as higher mortgage rates dissuade potential buyers," according to the memo from the Privy Council Office, which advises the Prime Minister and cabinet. "It takes time for the full impact of higher mortgage rates to be entirely felt due to many potential homebuyers locking in pre-approved rates."

BOC Governor Tiff Macklem has gone further since the July move with a 75bp hike on Sept. 7, and economists predict a half-point move at the Oct. 26 decision and perhaps a quarter-point in December. Royal Bank, Desjardins and Wells Fargo see a recession in the next year as higher borrowing costs and a shaky global economy hurt domestic activity and some economists see the Bank cutting rates in 2023. The Bank is hiking from a record low 0.25% and many Canadians have never lived through an era where debt servicing costs jumped.

DRAG ON SUPPLY

"House price declines are also expected to drag on housing supply by reducing builders' expected profits," the memo said. Housing starts and and permits had declined recently but remained above where they were before the Covid pandemic, officials wrote. Prices have kept falling since then, with the latest Teranet-National Bank index down a record 2.1% in August, with its analysts predicting another 10%-15% decline by the end of next year.

Trudeau's Liberal government has made housing and affordability a major priority, naming a cabinet minister to the file and setting up major fiscal measures. Private economists point out the government's target for expanding construction is a stretch for an industry struggling to find workers, and because the current pace of starts is already elevated by historical standards.

The PM's media office didn't immediately respond to a request for comment on the memo, on a day when many officials are marking a new commemoration to reflect on abuses of the country's aboriginals.

The document didn't suggest any policy moves for Trudeau, nor did it give any negative commentary on the central bank's decision making. A separate Privy Council Office memo for Trudeau obtained by MNI reviewing the Bank's July rate hike noted most real market interest rates would remain negative in the near term even after the outsized move. Investors at the time saw the BOC and the Fed hiking at about the same pace, helping "stabilize" Canada's dollar, that memo said.