Bank OF CANADA SENDS A WARNING
In his recent address, Bank of Canada Governor Tiff Macklem acknowledged the increasing concerns surrounding housing affordability and the potential hike in capital gains tax rates, noting that these issues are exerting significant pressure on the financial system. Speaking at the launch of the central bank’s annual Financial Stability Report on May 9, Governor Macklem identified these factors as potential triggers for substantial financial disruption.
Here are some key takeaways from the report that got my attention;
“The valuations of some financial assets appear to have become stretched, which increases the risk of a sharp correction that can generate system-wide stress.”
“Price corrections could be large and abrupt if expectations around the path for interest rates change significantly or if the economic outlook deteriorates significantly. Valuation risks could also materialize if ongoing large increases in the issuance of government debt cause term premiums and bond yields to rise.”
“Stretched asset valuations may not properly reflect risks to the economic outlook and therefore increase the likelihood of a disorderly price correction.”
Economists from the big Canadian banks have made recent forecasts that range from cautiously optimistic to dire regarding an anticipated June rate cut. But whether there’s a June rate cut or not, I think we are going to see a significant correction in the real estate market over the next year or two that the BOC will try to make as gradual and painless as possible. However, unforeseen market conditions could trigger a large, sharp, abrupt, disorderly price correction at any time.
Here’s a link to the BOC 2024 Financial Stability Report
