The start of interest rate cuts from the Bank of Canada has done little to stoke a fire in the Canadian housing market, fresh data from July shows.
Despite a “spotty” summer in residential real estate, experts who spoke to Global News expect lower borrowing costs will bring many buyers back into the fold this fall as pockets of affordability open up in some markets across Canada.
The Canadian Real Estate Association (CREA) said Thursday that home sales retreated by 0.7 per cent month to month in July, giving back some of the gains seen after the first central bank rate cut in June.
“While there were early signs of renewed momentum in June following the Bank of Canada’s first interest rate cut since 2020, activity in Canada’s housing market took a pause in July,” CREA said in a release.
CREA senior economist Shaun Cathcart tells Global News that the month was a mixed picture with some gains and some declines depending on conditions in local markets, the Bank of Canada’s latest rate cut didn’t come in time to fuel any jump in home sales like the tick-up seen in June.
The Bank of Canada has delivered two quarter-percentage-point rate cuts in back-to-back months, the most recent coming on July 24, impacting only the final week of the month’s sales.
Declines in the benchmark interest rate in Canada help to lower the barrier to entry into the housing market, making it easier for prospective buyers to afford a home.
Many market watchers have been accelerating their calls for interest rate cuts this year amid a shift in tone from the Bank of Canada after its latest rate decision. The central bank emphasized worries that the labour market will deteriorate further and inflation will fall too far, offsetting lingering concerns that it won’t achieve its price stability targets.
Expectations heading into the July decision that the Bank of Canada might pause its easing cycle at some point in 2024 have been replaced by growing calls among major lenders that the central bank will instead deliver at least a small rate cut at every meeting for the remainder of the year.
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Not only would that bring down variable-rate mortgages on offer in the market, but recent declines in bond yields are also expected to feed into fixed mortgages in the weeks ahead, Cathcart notes.
He says that the popular five-year fixed-rate mortgages are likely to fall further in the months ahead, making it a “slam dunk” that buyers who were struggling qualify for a mortgage will be better positioned for a run at the fall housing market.
“There’s a record amount of demand out there on the sidelines waiting to come back. The main thing they’re waiting for is lower borrowing costs, and they’re about to get that. So, it’s pretty much a no-brainer,” Cathcart says.
TD Bank economist Rishi Sondhi said in a note to clients Thursday that the slowing sales in July do not mean buyer demand won’t respond to lower interest rates, arguing that the rebound in home sales does not have to move in a straight line.
“We view July’s result as a speedbump on the way to a stronger second half showing for sales and prices amid a resilient economy, robust population growth, and falling rates,” he wrote.
Affordability may improve come the fall — will it be enough?
On a non-seasonally adjusted basis, the national average home price in Canada last month was $667,317, down 0.2 per cent from July 2023.
CREA’s Home Price Index, which gives a like-for-like comparison of property types, was up 0.2 per cent from June to July. That marks the second and largest gain in the last year, the association said.
Prices are growing in a majority of markets, CREA said, but appreciation is “held back” by slower activity in Ontario and British Columbia.
Robert Hogue, assistant chief economist at RBC, tells Global News that the summer housing market has been “spotty,” with conditions not really tightening enough to meaningfully drive home prices higher across the board.
He calls out the Prairies and Alberta as markets where supply remains tight.
New listings in the Canadian housing market were up 0.9 per cent from June, led by a jump in new supply in Calgary that Cathcart called “very much needed” for the high-demand market.
At the end of last month, there were roughly 183,450 properties listed for sale in Canada, up 22.7 per cent from last year but around 10 per cent lower than historical averages for this time of year, CREA said.
Cathcart says there might be more upward appreciation on home prices in the months ahead for those markets that are hungry for listings, shouting out Calgary, Edmonton and Saskatoon as some examples.
In Ontario and B.C., Cathcart says there’s enough inventory that anyone looking for a house has some choice and little fear of competing for properties.
“This is a market where you can go out and shop around and have some negotiating power,” he says. “It’s not a buyer’s market, anywhere. But it’s certainly a lot friendlier for buyers than it has been.”
Hogue predicts that home prices will hold “fairly flat” in the near term. It won’t be until late 2024 and into 2025 that prices are likely to accelerate, as borrowing costs drop enough to bring a bigger wave of buyers back into the fold.
Hogue agrees with Cathcart that recent declines in bond yields suggest that fixed-rate mortgages are likely due for further easing in the months ahead.
That will translate to some improvement in affordability, he says, but it’s an “open question” if the overall financial picture will change for the average homebuyer.
“My guess would be that by the fall, yes, there will be some improvement, but it may not be enough to make a real difference for a lot of buyers that are currently sitting on the sidelines,” he says.
One area that experts say might have further to fall in price is Toronto’s condo market, which as of late has swelled with a supply of largely pre-built units coming to market.
Cathcart says that even despite borrowing rates coming down, condos in Toronto likely have a bit more “price softness” ahead as investors seek to offload units. Entry-level properties like these are likely to see affordability improve even as prices remain elevated in Toronto’s townhome and detached spaces, he says.
“It could be an opportunity for first-time buyers to buy something in Toronto,” he says.