Spring housing market looms over the Bank of Canada’s rate decision. Here’s why

Click to play video: 'Spring housing market and Bank of Canada interest rates: What to expect'
Spring housing market and Bank of Canada interest rates: What to expect
WATCH: Spring housing market and Bank of Canada interest rates: What to expect – Apr 9, 2024

Fears that the spring housing market could “overheat” will be in the background as the Bank of Canada readies for its interest rate decision on Wednesday, experts say.

The spring housing market, which kicks off in March, is typically one of the busiest times of the year for home buyers and sellers in Canada.

So far, the spring housing season is a “mixed picture,” according to RBC assistant chief economist Robert Hogue, as the Bank of Canada’s benchmark interest rate remains high and boxes out some prospective buyers.

Preliminary data from local housing boards show some western markets, particularly in Alberta, saw a strong uptick in home sales in March. In Toronto, housing activity has declined for two consecutive months.

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Average home prices are meanwhile ticking up in some regions including the GTA after a correction in the market tied to the central bank’s rate tightening cycle over the past few years.

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“In some parts of the country, that recovery seems to be relatively robust,” Hogue tells Global News. “Prices are going up, but not that rapidly.”

Rishi Sondhi, economist with TD Bank, said in a housing market report released Monday that the first quarter of the year is “tracking stronger than anticipated.”

Unseasonably warm weather helped to fuel a hot start to housing activity in January and February, he noted, and some of those early sales pulled demand forward from the typically busy spring season. The Easter long weekend falling at the end of March also dampened overall sales in that month, he said.

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Business Matters: Toronto home prices rise in March, 2nd monthly increase since July

Like Hogue, Sondhi said he’s expecting a “modest” uptick in home sales and prices this spring, driven by pent-up demand in Ontario and British Columbia.

But both market watchers tell Global News they’re expecting many sidelined homebuyers will maintain their holding patterns until they get a clearer sign of lower borrowing costs on the way from the Bank of Canada.

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Worried the housing market could 'stoke' inflation

The Bank of Canada, too, has made clear that its eyes are on the spring housing market as it weighs whether it’s done enough to ensure inflation will keep cooling all the way back to its two-per cent target.

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Bank of Canada to make rate interest decision, release monetary policy report

In the deliberations released after the central bank’s latest interest rate hold in March, monetary policymakers “expressed concern that the housing market continued to pose upside risks to the inflation outlook.”

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While overall inflation cooled to 2.8 per cent annually in February, shelter inflation has remained a thorn in the side of the Bank of Canada, remaining above six per cent in the month. While the shelter component of the consumer price index (CPI) includes inputs like rents and mortgage interest costs tied to the central bank’s own policy rate, it also factors in home prices.

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A hot housing market could therefore “stoke shelter price inflation,” the Bank of Canada warned in March.

“If the housing sector rebounds in the spring, shelter price inflation could be pushed up, delaying the return of CPI inflation to the (two per cent) target,” the deliberations read. “If inflation proves more persistent than expected, monetary policy would likely need to remain restrictive for longer.”

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‘Robust’ GDP growth in early 2024 puts Bank of Canada in tough spot

But recent economic data has been largely positive for the Bank of Canada’s inflation fight.

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Annual inflation data has cooled more than anticipated in two consecutive months. While real gross domestic product to start 2024 has been hotter than expected, the March jobs report released on Friday showed relative easing, with the unemployment rate jumping to 6.1 per cent.

If the Bank of Canada cuts its policy rate on Wednesday, prospective buyers would likely come off the sidelines, Hogue says. A spring cut could give Canadians and market watchers expectations that the central bank’s rate cut cycle “could be a bit more aggressive” than currently anticipated, he says, fuelling a bit more activity in the market.

Such a scenario would not align with the Bank of Canada’s goal to avoid a reacceleration in price pressures, Hogue says.

“If the housing market were to overheat again, that could be counterproductive. So (the central bank) is mindful of that.”

There’s a “coiled spring” effect in the housing market right now, Sondhi wrote in his report, which poses a risk that sales and prices could rise higher than in the current TD Bank forecast.

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Even during the Bank of Canada’s current tightening cycle, buyers have driven sales activity higher in response to cheaper borrowing rates in the market. That happened last spring when the Bank of Canada announced a “conditional pause” in its rate hike campaign and at the end of 2023, with bond yields declining and driving down fixed mortgage rates in response.

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Sondhi told Global News in an interview on Monday the market is “responsive” to these developments that are positive for demand.

Rate cuts expected to skip spring housing market

But neither Hogue nor Sondhi have a rate cut from the Bank of Canada this week in their baseline housing forecasts.

Most economists are expecting the Bank of Canada will hold its policy rate steady again at 5.0 per cent on Wednesday, with calls for cuts to begin in either June or July.

Hogue says the central bank likes to signal its pivots well in advance, which would make a change in stance on Wednesday premature. But he adds that the latest economic data could allow the Bank of Canada to be a bit clearer that “an inflection point is imminent in its monetary policy.”

In addition to the dampening effect of higher interest rates, Sondhi said the lack of certainty from the Bank of Canada about where interest rates are heading is another factor constraining buyers. He agreed that this week could see the central bank provide clearer signals about a possible rate cut timeline, something monetary policymakers have so far been tight-lipped about.

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“The economic conditions that we see are supportive of cuts so they might open the door for that possibility in their April statement,” he told Global News.

But Hogue also warns not to expect a clear direction from the Bank of Canada one way or another. Monetary policymakers will want to “keep some options open” should inflation progress stall, or if the housing market trends hotter than economists are currently forecasting, he says.

“If the market does not behave the way we expect and starts to jump up very quickly and overheat, it could make the Bank of Canada take a step back and reassess its game plan,” Hogue says.

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BoC monetary policy targets inflation, not housing: Macklem

TD Bank is expecting the housing market to pick up in the second half of the year after interest rate cuts begin in July. Sales and prices are primed to increase, according to the forecast, but in many markets — particularly those most constrained by affordability — price appreciation will be limited.

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Even when interest rate cuts begin, Sondhi said he doesn’t expect housing to become meaningfully more affordable over the coming years as cheaper borrowing costs fuel rising prices, offsetting improvements in affordability.

For Hogue’s part, he says it won’t be until late 2024 and into 2025 that more buyers come off the sidelines, empowered by interest rate drops of one to two percentage points over the next few years.

“A drop in interest rates will help affordability and will bring more people, more buyers into the housing market,” Hogue says.

“But we will need a string of cuts before it makes a real difference to a lot of people.”

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