The Bank of Canada’s return to interest rate hikes will not be enough to fully tamp down an uptick in activity in the housing market, argues a new report from Desjardins.
Signals from the Bank of Canada that its interest rate tightening cycle had possibly peaked in January gave way to a housing market rebound in the spring, as April and May saw sales figures surge and prices begin to creep higher after a year-long correction.
“Canada’s housing market has rebounded sharply since March,” reads the report released Friday morning from Desjardins’ senior director of Canadian economics Randall Bartlett and principal economist Hélène Bégin.
But the authors note the stability that returned to the housing market in early 2023 coincided with the “prolonged pause” in rate increases that ended earlier this month. The central bank delivered another 25-basis-point hike amid signs inflation would prove stickier than initially forecast.
Desjardins expects another quarter-percentage-point increase at the Bank’s next decision on July 12, with the “door left open” for more hikes down the road.
“We think this will help to keep a lid on further increases in housing market activity in the next few quarters,” the authors wrote.
But, will the return to rising interest rates trigger another correction? Here, Desjardins believes the housing market has a bit of “staying power.”
On the demand side of housing, Desjardins economists note Canada’s population is growing at its “fastest pace in decades” tied to higher immigration levels, alongside similar growth in non-permanent residents.
While higher interest rates are limiting the buying power for many, Canadians keen to enter the housing market are supported by deeper-than-usual reserves of savings built up during the pandemic and strong income growth amid a tight jobs market, per the report.
As for supply, buyers returning to the market this spring have been met with historically low levels of inventory as sellers have largely been slower to list, according to the Canadian Real Estate Association.
Though housing starts have thus far proved relatively resilient to the pressures of higher interest rates so far in 2023, Desjardins’ economists expect a slowdown in new construction is looming.
“If history is any guide, we don’t expect elevated housing starts to last, as resale activity is still well below its pandemic peak,” the authors wrote.
An imbalance of supply and demand in the housing market is expected to cause prices to rise and affordability to erode in the years to come, according to Desjardins.
Projecting a 1.7 per cent decrease in the national average sale price in 2023, home prices are expected to climb 2.9 per cent in 2024, according to the report.
New Brunswick, Alberta and Nova Scotia are primed to see some of the strongest growth in sale prices over the forecast period.
Following projected average price declines this year of 5.5 per cent and 3.2 per cent in Ontario and B.C., respectively, the provinces are both expected to see a return to modest price growth in 2024.
The Desjardins report notes that without a significant shift in government policy or other market dynamics, housing affordability will continue to erode amid rising home values and the higher cost of borrowing.
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