Activity increased again in May – but could rising rates see demand fall?
The Bank of Canada’s pause on interest rate hikes in March and April of this year was heralded by many as a development that could bring confidence, and a degree of certainty about the housing market’s future, back to homebuyers.
The central bank had pursued an aggressive policy of rate increases since March 2022 as it grappled with sky-high inflation and an overheated economy, but signalled in its second and third rate decisions of the year that it would be prepared to hold rates where they were if economic trends continued to play out as expected.
That optimism arguably helped spur a housing market revival of sorts, with sales and prices heating up as prospective buyers resumed their search. Sales were up again in May, according to new Canadian Real Estate Association (CREA) figures, marking a fourth successive month that activity has increased.
National home sales increased by 5.1% on a month-over-month basis, the association said, with the MLS Home Price Index jumping by 2.1% over April and recording its first yearly increase for nearly two years.
With that bump in sales and activity taking place just before the Bank of Canada’s latest rate hike – an unexpected one in some quarters – how might the market be impacted in the months ahead?
Mortgage Outlet broker and chief operating officer Leah Zlatkin (pictured top) told Canadian Mortgage Professional that two weeks prior to the Bank’s latest decision, she would have forecast a “red-hot market” with prices continuing to rise and activity ramping up, but said the outlook is now more uncertain following the rate hike.
“We saw people starting to list homes and actually sell for better value than we had seen in the last few months,” she said in the wake of the Bank decision. “So prices are not back up to [their] COVID level necessarily, but… have gone back up a little bit.”
How are sellers viewing the current market?
Many homeowners who may have been sitting on the fence about selling saw the way the market was moving in recent weeks, Zlatkin said, and decided now was a good time to list their property – but demand levels could undoubtedly be weighed down by rising interest rates, particularly with further hikes potentially on the way.
“For people who don’t have a pre-approval yet, or for people who would be purchasing or closing outside of that pre-approval window, the desire to buy a home may be less so now because they worry about changes in interest rates and they worry about what is going to happen in the future,” Zlatkin said.
“And so for anybody who’s a bit of a worrier, they might choose to sit on the sidelines for a little bit longer and wait it out. And that might decrease demand sufficiently – if all of a sudden the demand dwindles a little bit, that can cause major problems.”
Borrowers who are struggling to qualify in the current environment are largely having to choose five-year fixed products despite those sometimes not being great options, Zlatkin said, presenting two challenges: firstly, “Where are rates going to go, and how comfortable do I feel in this environment?”
Secondly, with rates having risen further, many borrowers who had a specific budget to buy are now seeing that reduced. “Does it still make sense? And can we still get the house that we want for that, because rates keep going up and now I qualify for less?”
The Canadian economy has exhibited remarkable robustness, but a “bumpy landing” still remains a distinct possibility, according to the Royal Bank of Canada.https://t.co/jtexzDzRsu#mortgagenews #marketupdates #economy #interestrates
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 13, 2023
Could lack of supply continue to hinder Canada’s housing market in 2023?
CREA’s chair Larry Cerqua said in remarks accompanying the May sales figures that housing supply, “which remains quite low,” would be a key determinant of sales and price activity for the remainder of 2023.
Its senior economist Shaun Cathcart, meanwhile, said if there’s no uptick in existing owners supplying the market with new listings, “this housing demand rebound may play out more acutely than might have been expected on the price side this year.”
New listings remain around historic lows despite increasing by 6.8% in May compared with the previous month, while the number of months of inventory on a national basis continued to tick downwards, having fallen by more than one whole month since the end of January.
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