After a pause, rates are on the up again
The prospect of scores of mortgages renewing at higher rates in the coming years is bound to have a “big impact” on Canada’s economy – but there’s little indication that the floor is anywhere close to falling out of the national housing market.
That’s according to Canadian Real Estate Association (CREA) senior economist Shaun Cathcart (pictured top), who told Canadian Mortgage Professional that while a bumpy ride could be in store in the coming years, home prices were likely to continue climbing.
The Bank of Canada’s series of interest rate hikes may see borrowers cut back on spending in other areas, but keeping hold of their home is almost always homeowners’ number-one priority, he said.
“People will do everything else before they give up the family home,” he said. “How many trips to Disney World don’t happen? How many Friday night dinners out don’t happen? How many driveways have one car instead of two? That’s the kind of stuff that goes first.”
Much will depend on the future path charted by the central bank, which resumed its rate-hiking trajectory on June 7 after hitting pause for two successive announcements. Financial markets currently expect the Bank to introduce another increase in July, a move that would bring its benchmark rate to 5%, before winding down towards more neutral levels – around 200 basis points lower – in 2024 and 2025.
What’s next for the housing market?
Still, while further rate hikes might slow the economy even more, a recession has yet to materialize in Canada, with the housing market having witnessed a protracted boom for much of the last seven years.
Cathcart noted that active listings across the country have been dwindling since 2015, and said that a red-hot market may have materialized in the pandemic years even without the outbreak of COVID-19 and the rock-bottom rates that followed.
“Most of that would have happened anyway,” he said. “Prices did double from 2016 to 2022, and now they’ve given back quite a bit of that. So now they’re on the rise again. We’re going into year eight of this housing boom which is longer than most of the historical ones.
“However, the stress test put it on pause for two years, and then last year put it on pause for all of 2022. So if anything, if you take those out, this is year five of this housing boom, and I think that we’re going to get to prices doubling by the end of this year, just like every other previous one – which would be $800,000 at the national level. We started at $400,000 back in 2016.”
Strategies like extending mortgage amortizations and changing the insured mortgage qualification threshold will not be effective housing #affordability measures, says Romy Bowers, President & CEO of Canada Mortgage and Housing Corporation.https://t.co/OJvhwZzChk#mortgagenews
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 20, 2023
Are rates set to rise again?
May saw national average sales prices in Canada’s housing market continue to rebound after plummeting throughout last year, with a 3.2% increase over the same time last year marking another month of growth.
Noting that Canada’s economy continues to operate at a stronger-than-expected clip in the year to date, the central bank said in remarks accompanying its latest hike that housing market activity had picked up while consumption growth remained elevated and demand for services was rising.
Excess demand in the economy “looks to be more persistent than anticipated,” the Bank said, with the labour market also remaining tight and immigration set to continue fuelling housing market activity.
After a probable 25-point hike in July, the central bank is likely to use the remainder of the summer to weigh up if its approach is sufficiently cooling the economy – and whether further increases are required, Cathcart said.
After its July 12 decision, the Bank’s next announcement on interest rates is scheduled to take place on September 6, with a host of economic data set to be announced in the gap between those two meetings.
“I’m sure they’re going to be nervous, because that’s a longer break between announcements and so they’re going to be really crossing their fingers that things don’t continue to spring out of control – the looming recession that people have been talking about for a year that we’re supposed to be in right now,” Cathcart said. “And if everything’s firing on all cylinders, we’ll see how that plays out.”
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