Interest rate cuts fail to spark spring market frenzy
The Canadian real estate market continues to struggle, with an anticipated spring surge in activity failing to materialize.
The aggregate price of a home in Canada rose 1.9% year-over-year to $824,300 in the second quarter of 2024, according to the Royal LePage House Price Survey released today. Quarter over quarter, the national aggregate home price rose by 1.5%, even as activity slowed in the country's priciest markets.
Did rate cuts boost buyer demand?
"Canada's housing market is struggling to find a consistent rhythm, as the last three months clearly demonstrated," Royal LePage CEO Phil Soper said in the report. "Nationally, home prices rose while the number of properties bought and sold sagged; an unusual dynamic. The silver lining: inventory levels in many regions have climbed materially. This is the closest we've been to a balanced market in several years.”
The Bank of Canada's recent decision to cut the overnight lending rate by 25 basis points to 4.75% on June 5th did not prompt an immediate surge in market activity as expected.
"This spring, with bank rate cuts highly anticipated, we saw some buyers race to get a deal done ahead of an expected spike in demand," Soper noted. “Yet, when that first cut finally occurred in early June, market response was tepid."
What do buyers need to return?
According to a Royal LePage survey conducted earlier this year, 51% of potential buyers who had paused their search said they would resume if interest rates were reduced. However, only 10% indicated that a 25-basis-point drop would be enough to bring them back into the market.
The survey found that 18% are waiting for a cut of 50 to 100 basis points, and 23% want a reduction of more than 100 basis points before reconsidering their home search.
"A change in monetary policy drives consumer behaviour in two important ways,” added Soper. “Lower rates mean lower monthly payments, opening the door to some families previously shut out of the market. Secondly is the psychological signal broadcast to sidelined buyers that the tide is turning, and that market activity is about to pick up again.
"Not surprisingly, the quarter-point cut to the bank rate didn't substantially improve the affordability picture. The tale the market tells as rate cuts get to the point of a material reduction in the cost of borrowing should be a very different one."
The Royal LePage National House Price Composite, which includes data from 64 major real estate markets across Canada, showed that the national median price of a single-family detached home increased by 2.2% year-over-year to $860,600.
Meanwhile, the median price of a condominium rose by 1.6% to $596,500. On a quarterly basis, single-family detached home prices increased by 1.8%, while condominium prices rose by 0.8%.
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The national aggregate home price remains well above pre-pandemic levels, recording a 30.8% increase over the same period in 2019.
"2024 marks the fifth year since the pandemic and post-pandemic rebound began to wreak havoc on real estate prices," Soper said. "Yes, values remain well above 2019 levels, yet a 30% rise in home values spread over five years, or 6% annually, is approaching long-term norms for Canadian residential property appreciation."
What’s the forecast for home prices?
Inflation and interest rates have significantly impacted the housing market over the past two years, with fluctuating home prices and stalled market segments due to higher borrowing costs.
"Canada's housing market faces pent-up demand after two stifling years of high borrowing costs," Soper observed. "While inflation control is crucial, persistently high rates are increasing the risk of a surge in demand when buyers inevitably return."
High borrowing costs have also slowed new home construction, further exacerbating the housing shortage.
"Gradual interest rate reductions could unlock a housing supply logjam," Soper said. "Lower rates would not only empower buyers but also incentivize builders, who rely on borrowing for development."
Canada Mortgage and Housing Corporation (CMHC) reported a slight increase in national housing starts in May, following two months of decline. However, the rate of new construction remains below what is required to meet growing demand.
"Our population is growing steadily, yet we're building far fewer homes than what's needed to meet that demand. This situation urgently needs innovative solutions to ensure Canadians have access to affordable housing options," Soper added.
Royal LePage forecasted that the aggregate price of a home in Canada will increase by 9% in the fourth quarter of 2024 compared to the same quarter last year. Nationally, home prices are expected to see moderate appreciation throughout the second half of the year.
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