Two consecutive interest rate hikes from the Bank of Canada are expected to cool the national housing market after activity heated up in the spring, but experts warn supply is too tight for further price drops.
Citing concerns that the decline in inflation “could stall,” the Bank of Canada raised its benchmark interest rate by 25 basis points on Wednesday, mirroring a hike seen in June that ended a brief pause in the central bank’s tightening cycle.
Canada’s economy has proved hotter than the Bank of Canada expected over the first half of the year, and officials said Wednesday that a surge in housing market activity over the spring was part of the reason.
Bank of Canada governor Tiff Macklem said Wednesday that while rate hikes initially slowed activity in the housing market and in other interest rate-sensitive sectors, demand hasn’t “slowed as much as we thought they would.” He went on to cite housing activity ticking back up again as part of the justification for rates needing to rise and stay higher for longer.
“We have been surprised, actually, that housing has started to bounce back as quickly as it has,” he told reporters Wednesday.
The Bank of Canada wasn’t the only one surprised by the spring market.
John Pasalis, president of Realosophy Realty brokerage in Toronto, says that even with interest rates still substantially higher than they were a year previous, some markets started to resemble the pandemic-era levels of activity.
Much of that was tied to 20-year lows in inventory levels, Pasalis says, as the buyers re-entering the market had a limited supply of homes to bid on.
“We went back to a very heated and competitive market with tons of offers on homes and prices actually increased during the first half of this year,” he tells Global News. “And no one saw that coming.”
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Brokerage Royal LePage on Thursday released a report recapping the second quarter of 2023 that shows how much home prices rebounded in the spring while the Bank of Canada’s policy rate was on hold.
The national aggregate home price was up four per cent quarter-to-quarter in Q2, Royal LePage said, coming in at $809,200. That’s the second consecutive quarterly increase in prices following a steep decline through much of 2022 tied to the central bank’s rate hike cycle.
The second quarter aggregate price was just below the same period last year and 5.6 per cent lower than the peak seen in the first quarter of 2022, Royal LePage said.
CEO Phil Soper tells Global News that the uptick in both sales and prices in the spring was directly tied to the Bank of Canada announcing it would pause rate hikes.
“As soon as we had that meeting back in the spring where there was no change for the first time in 12 months, the market leapt into high, high levels of activity,” he says.
Two rate hikes have cooled the fervent spring market
Experts who spoke to Global News say excitement in the market started to shift after the Bank of Canada’s June rate hike, a move that surprised many economists at the time.
Early data from regional real estate boards show signs of a “contraction” in sales last month, says Randall Bartlett, senior director of Canadian economics at Desjardins.
Buyers who thought they were in the clear for additional rate hikes now have to be more “tepid” about their house hunt, he tells Global News, compared to the spring when they had some relative certainty about where the Bank of Canada’s policy rate would go.
“These couple of rate hikes have helped to cool off a lot of the enthusiasm around the Canadian housing market,” Bartlett says.
Pasalis, too, says “the sentiment has completely changed” among buyers who were hoping the Bank of Canada’s next move would be an interest rate cut, not the two hikes they’ve gotten instead.
Impact of latest Bank of Canada interest rate hike in Toronto
“At the beginning of the year, the Bank was pausing. People thought: ‘The worst is behind us, the only path forward for rates from here was down.’ And in June, the Bank of Canada basically crushed that idea,” he says.
Soper says that, from Royal LePage’s perspective, many buyers are “ignoring” the latest rate hikes in the belief that the Bank of Canada is at or near the peak of its rate hike cycle.
Macklem said Wednesday that the central bank will take its next rate decisions on a meeting-by-meeting basis.
There will be some homebuyers who are priced out of the market and will need to wait for rates to drop to lower their carrying costs, Soper concedes. But with the housing correction appearing to have bottomed out and rates likely remaining elevated for a longer time, buyers who have been putting off the decision in hopes of a cheaper purchase price have realized today’s market is as good as it gets for a while, he says.
“Waiting in a market where homes are just going to get more expensive really doesn’t make sense if your family needs the housing today,” Soper said.
Where will home prices go?
Things are a bit different for sellers, however.
Pasalis says that some investors who have been holding onto properties and stomaching higher payments in hopes of lower rates on the horizon might be pushed to sell.
But for buyers in the market today who are now qualifying for mortgages around six per cent — and getting stress tested by the lenders at eight per cent — those who also need to sell their homes are in many cases feeling “stuck,” Pasalis says.
Sellers looking to upsize their homes can’t qualify for the kind of property they want, which is leading them to stay put if they can, he says.
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That’s limiting the amount of supply coming onto the market, especially among entry-level homes. Pasalis says that’s going to ratchet up stress on the rental market, as those looking to enter the ownership market are priced out and forced to compete with newcomers to Canada such as students looking for apartments.
A limited number of properties for sale and growing demand tied to immigration and non-permanent residents could put some “upward pressure” on prices this fall, both in the rental and ownership markets, Pasalis says.
Bank of Canada officials on Wednesday also pointed to strong immigration levels and a lack of available supply as likely to keep home prices on the rise in the months to come.
Consumer spending & rate hikes
“One of the fundamental things that’s holding up house prices in Canada is there’s just more demand than there is supply,” said senior deputy governor Carolyn Rogers.
Soper says that most of the run-up in prices this year has probably already taken place, but Royal LePage expects home values will continue to climb modestly through the second half of 2023.
In an updated forecast as part of the Q2 housing report, Royal LePage said it expects home prices in the fourth quarter will end the year 8.5 per cent higher than in 2022, up from earlier calls in the spring of 4.5 per cent annual growth.
Soper says that urban centres like Toronto, given their reputations as immigration hubs, will probably see the most growth in prices to the end of the year — potentially even erasing some of the losses seen through the past year’s housing correction.
In November, the federal government set a target of welcoming 1.45 million new immigrants over the next three years, with the goal of bringing in 500,000 newcomers per year by 2025.
“People may be surprised by this, but everyone who bought, even in the peak of the pandemic, will be back to break even sometime this year, given the strength of the recovery,” Soper says.
Rate cuts might not spur housing ‘boom’
Soper says that when the Bank of Canada eventually does cut interest rates — banks including BMO and CIBC are calling for that sometime in the second quarter of 2024 — expect the lower cost of borrowing to open the “floodgates to demand,” with a return to “sharp increases” in home values.
With that rapid run-up looming on the horizon, Soper says the pressure is on governments of all levels to incentivize faster building to ensure adequate supply is ready to accommodate demand.
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Pasalis says even the suggestion of lower rates could stimulate a “massive boom in demand” in a similar vein to the uptick in activity this past spring when the central bank’s policy rate was on hold.
However, he isn’t convinced an eventual drop in interest rates will necessarily mean a spike in demand and prices.
The reaction in the housing market to rate cuts depends, in part, on how well Canadian households are doing at that point, Pasalis notes.
If the expected economic slowdown is particularly sharp, he says that prospective homebuyers might not be in a position to jump back into the housing market, especially if they’ve lost their job or taken another hit to their incomes.
“At the end of the day, you need capital to go out and buy houses, right?” Pasalis says. “So if capital dries up a little bit, we might not have a boom.”