The Bank of Canada held its benchmark interest rate steady on Wednesday — a decision real estate players and economists say will have major implications for the Canadian housing market.
After all, most market watchers point to the central bank’s aggressive interest rate hikes over the last year as driving the slowdown from the pandemic-era highs seen a year ago to the calmer real estate waters seen in many cities across Canada today.
The decision to hold interest rates steady could mean the bottom of the housing correction is in sight, experts say — but the uncertainty of future rate hikes still looms over prospective buyers and sellers.
Here’s what to know.
Seasonality returning to the housing market, watchers say
Even before the Bank of Canada formalized its decision to pause rate changes on Wednesday — it all but telegraphed the move after a quarter-point hike in late January — some housing markets in the country were already showing signs of life following the pronounced downturn in 2022.
In Toronto, while home sales and prices alike were markedly down from a year earlier in February, both figures saw an uptick from January, according to the local real estate board.
Pritesh Parekh, a realtor with Century 21 in Toronto, says he’s seen clients “definitely hitting the gas” ever since the January rate hike and signals for a pause began.
With Wednesday’s rate hold coming to fruition, he sees that trend continuing at least through March.
Parekh says that among his peers in Toronto real estate, there’s debate about whether the rise in activity is a “blip” or if the housing market downturn has truly bottomed out ahead of a spring resurgence.
“There are people on both sides of the fence,” he says. “I’m expecting a boom, if I had to guess right now.”
Phil Soper, the CEO of brokerage Royal LePage, tells Global News that while the actual volume of sales and prices might be lower than recent years, Canada’s housing market could be seeing the return of seasonal patterns after a slower December and January gave way to an uptick in activity last month.
The Bank of Canada’s rate hold affirms this return to seasonality, he argues, with the path now clear to the traditionally busy spring market. Buyers and sellers should have more confidence that prices will be steadier without additional rate hikes to depress home values, he says.
“In other words, we’ve reached the bottom of the cycle and it’s uphill from here,” Soper says.
The Bank of Canada did not provide such certainty in its messaging on Wednesday, however.
The central bank maintained the wait-and-see stance for its policy rate and left the door open to additional rate increases in 2023 if there are additional economic shocks that knock its inflation forecast off-kilter.
Soper acknowledged that the prospect of additional interest rate hikes from the U.S. Federal Reserve, which could put pressure on the Bank of Canada to raise its own rate to keep pace and rally the Canadian dollar, is one significant upside risk that he’s watching. Multiple big bank economists in Canada reacting to the central bank’s hold on Wednesday echoed those concerns.
“It does remain one of the murky areas as we look ahead,” Soper says.
While Ratehub co-CEO James Laird agreed that Wednesday’s rate hold provides a bit “more certainty” for buyers wondering about what kinds of mortgage rates they can get this spring, he tells Global News that any fogginess in the rate path will tend to depress housing market activity.
“The more stability there is from a mortgage rate perspective, the stronger a foundation the housing market will have,” he says. “People really don’t like uncertainty, and when there’s uncertainty from a rate perspective, they tend to put off that buying decision.”
A Royal Bank of Canada forecast released earlier this week indicates that a bottom for the housing market could be in sight for “sometime this spring,” but assistant chief economist Robert Hogue also pinned that outcome on having reached the peak of interest rates.
He noted that some markets such as Ontario and Atlantic Canada might hit that bottom early, while the Prairies and Quebec could see their correction more drawn out.
Hogue said he expects the recovery phase will be slow as a weak economy holds back buyers, with a more robust return to the market set for 2024 when and if interest rates start to fall.
Limited housing stock a significant factor
Parekh says that while he’s hearing from more clients so far in 2023, it’s mostly on the buyer side, rather than sellers.
As a result, inventory remains constrained for the buyers emerging from the sidelines and competition is heating up in some parts of the market, he says.
Data from the Canadian Real Estate Association (CREA) shows that despite an uptick in new property listings to start the year, housing stock is still “historically low.” January 2023 marked the lowest level for new supply in that month since 2000, CREA said, though February figures have yet to be released.
Multiple-offer scenarios are popping up on some attractive properties in Toronto, Parekh says. It’s happening mostly on well-staged homes in “desirable” neighbourhoods and moreso in the detached market than condos, from what he can see.
But if the sound of “bidding wars” is giving flashbacks of the pandemic highs when properties would see dozens of offers in a housing frenzy, Parekh cautions that today’s market isn’t even close to that.
“If we’re comparing from one year ago to today, 100 per cent there is a difference,” he says.
Though the limited housing stock is pushing the existing buyers towards the same properties, he says many of today’s buyers have a bit more patience and are even willing to attach conditions in multiple-offer scenarios.
“I am seeing offers come in that might not be as ‘wild’ or ‘crazy’ as we’ve seen a year ago, but they’re throwing their hat into the ring and seeing what comes out of it,” Parekh explains.
Soper says that for buyers testing the waters this spring, “affordability” will continue to be a priority as still-high interest rates push house hunters to cheaper options.
As a result, he expects condos to outperform detached homes overall this year, and that buyers priced out of the most expensive markets will migrate to more affordable regions and cities such as Calgary, Edmonton and Halifax.
Current inventory trends suggest that, in many markets, sellers might retain the upper hand this spring with limited options for buyers, Soper says.
“It is very much still a seller’s market simply because there are fewer sellers out there than you’d normally see during a spring market,” he says.
Parekh agrees that getting sellers off the sidelines will be key to the kinds of moves buyers can make in the months to come.
“If the spring market starts to come with more supply, I think that will be a little bit more helpful in terms of how buyers can do something in this market,” he says.