Canada’s Largest Real Estate Market May Move Lower Despite Rate Cuts: BMO

Canada’s Largest Real Estate Market May Move Lower Despite Rate Cuts-BMO

Canada’s largest real estate market finished the year with a surprisingly strong month. Toronto real estate sales got a boost in December from cheaper credit, anticipated to get even cheaper in the coming months. Despite the return of some exuberance to the market, prices continued to fall. BMO is warning investors this trend may persist in the near term due to affordability challenges. 

Toronto Real Estate Market Saw Some Demand Return Last Month 

Toronto real estate finished the year with a little more energy than it has been showing. Seasonally adjusted home sales across TRREB rose 21% compared to a month before. Unadjusted they were nearly 12% higher than the same month last year. The comparison period isn’t exactly a boom time, but it does show a sentiment shift.

Source: BMO Capital Markets; CREA. 

“This puts unit sales back at June levels, just when the BoC was re-teeing another round of rate hikes,” explains Sal Guiatieri, a senior economist at BMO.  

Financing costs are one of the big drivers, according to Guiatieri. “Expectations of another BoC rate pause and even outright cuts by the spring look to have rekindled the smoldering embers in Toronto’s housing market,” he wrote.   

Fixed-rate financing costs have already begun to fall. Unlike variable rate mortgages, these are influenced by Government bond yields of similar term lengths. The latest regulatory data shows loan interest averaged 5.78% for a new 5-year fixed-rate mortgage in October. As of this morning, 4.79% was the lowest rate widely advertised by lenders. This echoes the roughly 1-point decline in Government bond yields over a similar period. 

Prices May Continue To Fall Despite Cheap Credit

Cheap debt and exuberance are likely driving expectations. Most people have consulted their magic 8 ball and expect the central bank to cut the overnight rate soon. BMO itself is currently forecasting the first cut in June, in line with expectations from most financial institutions. 

Population data has also been more than robust, with few signs of slowing anytime soon. It’s easy to see how this is fueling further expectations of low inventory and rising rents, bullish for investor returns. However, as strong as the narrative is, it’s not a total slam dunk warns the bank.  

Despite an unexpected bump for activity last month, it was just one month. More importantly, the bump in demand wasn’t enough to stop prices from falling further. 

“… benchmark prices look to have fallen for a fifth straight month (s.a.) and the yearly rate has turned slightly negative again,” he warns. 

And while sales were higher, they weren’t strong enough to demonstrate support at this price level. Especially against a backdrop of higher inventory. 

“… poor affordability could see further price softness in the months ahead,” warns the bank.

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  • dave frazer 6 months ago

    When interest rates fall,more buyers can afford a house. However, that does not necessarily bring increased sales. If values are falling buyers may opt to sit and wait and might avoid the market for months or even years. Depends totally on the rate of fall an annual fall rate of under 5% might not affect sales all that much but a 10% annual decline will stop sales dead.

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