The possibility of a stronger-than-expected Canadian real estate market may impact the course of monetary policy in Canada, TD Bank economists say.

In a research note issued Tuesday, TD economists say that the housing market is an upside risk factor worth keeping an eye on as far as the Bank of Canada is concerned. Recently, home prices have rebounded, but the Bank of Canada expects this strength to be temporary. However, if the rebound proves stronger than anticipated, TD suggests that the central bank could be pushed to tighten earlier, or more aggressively, than expected.

“Governor Carney has expressed the view that the strength in existing home sales are ‘temporary’, reflecting ‘pent-up demand’ and improved affordability. However, if surging existing home sales do not cool, the Bank may be inclined to respond,” TD says.

“Governor Carney’s comments suggest that government regulatory actions are preferable to monetary policy action to address sectoral imbalances, but given that the overnight rate is at a mere 0.25%, there is a significant risk that the Bank might lift the overnight rate to help temper real estate activity,” TD adds. “And, the response could come while inflation is still below target.”

That said, TD Economics maintains that the most likely scenario is that the real estate market will cool, that inflation will remain subdued, and that the Bank of Canada won’t be forced to move to deflate a potential asset bubble in that sector, “but it is a risk worth closely monitoring”, it says.

IE