Still, activity is expected to moderate significantly
Last week’s jump in interest rates is likely to slow activity in Canada’s housing market – but there’s little prospect of a protracted slump, according to a leading bank economist.
Doug Porter (pictured), chief economist at BMO, told Canadian Mortgage Professional that the Bank of Canada’s latest rate hike would probably temper the immediate homebuying ambitions of many would-be entrants to the market, although he said activity would moderate rather than stall entirely.
“In the first half of the year, one of the big surprises was that the housing market started to find a pulse again, and at one point it was actually in seller’s market territory by a number of measures in many key markets,” he said. “I think this backup in rates will throw a bit of a wet blanket on the housing market.
“I’m not looking for it to go into a tailspin by any means. I think it will remain relatively resilient, but it’s going to be tough sledding for the housing market with this latest backup in rates and the warning that rates are going to stay at these kinds of levels for a while.”
The Bank of Canada’s latest move took its benchmark policy rate to its highest level for over 22 years, hitting the 5% mark after a second consecutive 25-basis-point hike.
The central bank has now upped its trendsetting interest rate 10 times since March last year – and it may take some time still for the full impact of that flurry of hikes to become apparent, according to Porter.
“I’m still of the view that the market has not fully digested the backup in rates in the past year, let alone these two latest moves,” he said. “So after a nice little bloom this spring, I think things will just kind of bounce along, move sideways for six to 12 months.”
How much attention is the Bank of Canada paying to the housing market?
The Bank has long said returning inflation to its 2% target is far and away its overriding concern when it comes to the economy – but the fact that the national housing market featured relatively prominently in its recent statement is a sign that it’s closely attuned to what’s happening there, Porter said.
The central bank’s statement last Wednesday indicated that the market had “seen some pickup” with new construction and real estate listings remaining sluggish behind demand, adding pressure to prices.
It also said that high immigration levels and population growth were increasing consumer spending and demand in the housing market.
“I did find the fact that they devoted two sentences to the housing market in their policy statement interesting,” Porter said. “In the past they wouldn’t talk that much about housing, but I do think they’re keeping a close eye on things and using it as a gauge to see how the economy is dealing with higher interest rates.
“As I was saying all through the spring, if the housing market is making a comeback and being resilient, then the rest of the economy must be doing fine because housing is the most interest-rate sensitive, the most cyclical sector of the economy. If they can deal with these interest rates, then certainly the rest of the economy can – that’s why the Bank is staying so focused on housing.”
How are rising rates likely to weigh down on housing market activity?
Higher rates are at least part of the reason the Canadian Real Estate Association (CREA) has revised its home sales forecast downwards for this year and next.
In April, when the Bank of Canada had paused its series of rate hikes, the association expected national home sales for the year to come in at 492,674 – but on Friday, it had reduced that figure by over 28,000.
Canadian 🏠 sales edged up 1.5% between May and June 2023, a smaller increase than in April and May.
— CREA | ACI (@CREA_ACI) July 14, 2023
Details 👉 https://t.co/u23dHtftkK pic.twitter.com/G6bBP9tCEN
It now expects 2024 to see 516,043 sales, down from its April forecast of 561,090, with a “growing consensus” that rates are likely to remain at an elevated level for a longer period.
The impact of the latest hikes on the national housing market remains to be seen. Home sales across the country edged up by 1.5% on a monthly basis in June, CREA said, as the actual number of transactions rose by 4.7% last month compared with the same time in 2022.
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