Canadian Real Estate Is Once Again Inflationary, Reinforces Need For Hikes: BMO

Here’s How Toronto Rental Prices Are Doing Across The City

Canadian real estate prices are rising, and that’s bad news if you’re looking for cheap credit. Statistics Canada (Stat Can)  reported new home prices made the first increase in nearly a year. In a research note to investors, BMO warned the increase is just one of many housing data points that shows shelter is back to driving inflation. That helps to justify the recent central bank rate hike, and potentially opens the door to further hikes. 

Canadian New Home Prices Return To Growth

New home prices made a small increase, but more importantly ended the losing streak. Stat Can reported the price of a new home increased by 0.1% in May, the first increase since August 2022. Builders attributed the increase to higher labor and material costs, which are still trickling into prices. 

Even though it’s a small increase, it’s a concern to see price growth return already. “The size of the move (+0.08% for the house-only component) isn’t as important as the direction, which is now positive for the first time since the correction began last year,” said Douglas Porter, senior economist at BMO. 

Canadian Housing Is Driving Inflation (Again) 

That’s bad news on the inflation front, and means rates weren’t high enough to temper expectations. “This flows directly into the CPI, and suggests that all major aspects of shelter (choppy utilities aside) are again inflationary,” explained Porter. 

He continues drilling on housing-driven inflation, “Rents are pushing steadily higher; mortgage interest costs are reflecting past rate hikes; replacement cost is again rising; and “other” expenses such as real estate fees are also on the rise with an upturn in resale prices.”  

Bank of Canada all Clear For More Hikes, Recent Move Justified

Higher home prices might be good for owners, but it’s questionable if the net impact is a benefit. Shelter costs trickle into virtually every component of inflation, driving general costs much higher. 

The Bank of Canada (BoC) has repeatedly warned they won’t allow inflation to re-accelerate, and the recent “surprise” rate hike now has more context. 

“This just highlights again why the Bank of Canada likely saw positive momentum in housing as a reason to hop off the bench and raise rates,” said Porter. 

Porter has previously stated he expects at least two more rate hikes. The return of new home price growth likely reinforces that forecast. 

17 Comments

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  • Fraser 12 months ago

    People are in for a real shock…..rates are going much, much higher…..eeeehhhhhaaaaaa…..its about time.

  • Mark Bayly 12 months ago

    Interest rates will have to go to 10 per cent because real inflation is above 15 per cent

    • Arjay 12 months ago

      Mortgage lending norms have to be changed. A second mortgage should be treated as a commercial loan.

    • Frank 12 months ago

      BOC is focused on inflation only, problem is ppl still need to eat and buy shoes. Carbon tax is not helping, farmers to truckers have to download the extra cost to consumers. Vicious cycle, the BOC will break the country and ultimately the game plan is for as many ppl as possible lose their homes. We were fine until excess taxation caused by an utter disregard to the very ppl that pay the taxes to watch their money go overseas with no accountability. The damage done in Canada will take decades to recover .

  • Ray Hoskins 12 months ago

    That makes sense. Home prices are going up so increase the interest rate so that the ones that have a mortgage that can barely able to afford it can look forward to even bigger payments, then have to sell because its either that or have it taken away when they can’t meet the new payments. That way there will be more houses on the market. Why not just build more housing. There is obviously a shortage. Consumers have no control on energy, food or housing costs but have to pay a penalty by way of interest rates because of the inflation. Great for people that are wealthy but not the majority.

  • Nav 12 months ago

    Rates should be increased. BOC’s low rate policy created the current affordability crisis. Another factor is the federal government immigration policy. The number of new immigrants should be reduced to 200k or lower levels. International students also coming in thousands. That’s another concern to be addressed .

  • Peter Pan 12 months ago

    The primary if not the only reason the home prices are still where they are and not lower appears to be the lack of sufficient inventory, or to put it otherwise, there I supply shortage for housing. The supply issue cannot be fixed by higher rates. Higher rates moderate the demand, but they make the supply issue even worse.

  • Dan Martin 12 months ago

    Seriously anyone who has millions in the bank or who doesn’t yet own property loves this. It isn’t going to lower your grocery bill though. They are Seriously intent on putting hundreds of thousands of people out of their homes.

  • Mehrdad 12 months ago

    People are struggling, their mental and physical health is in danger as they are trying harder to comply with their expenses, the prices in groceries have already gone up significantly, and this will have a negative long term effect on people, regardless of their job and their age. Those with very good income may still afford buying houses, but what about most of Canadian?
    If you look at the reality, for some time you might reduce the houses price, but later it will jump and I believe it would be a disaster,
    I hope Im wrong.

    Thank you.

  • BCModerate 12 months ago

    It’s beginning to look a lot like Christmas!

    Hike hike hike away!
    Lets bring back a real economy!
    Lets cleanse the thieves, the cheap-suits, the shysters, the grifters, and the slumlords!

    Viva la resistance!

  • Dee 12 months ago

    Who created this mess with housing? I’ll give you one guess.

  • Rocky 12 months ago

    Daniel – you wrote an article back in January 2023 saying Toronto Real Estate Prices are crashing. Now you post the above article saying it is back on the rise. Which is your official position?

    • Timmy O’Toole 12 months ago

      His position is irrelevant, since this is reporting a BMO analysis.

      I’m shocked how many people in Canada would fail Grade 7 English due to not being able to identify the subject of a paragraph.

  • Dar 12 months ago

    I personally, a single mom who raised 2 kids working full time and part time can not afford any further interest increases. I am a diabetic and my one son have very strict diets that cost more than the average diet and can not keep up with the food increases or any increases. I bought my home myself so my son would have a place to live if something were to happen to me. I can’t and won’t risk his well being.
    Think about us little people and stop the increases!!!

  • William Herbert 12 months ago

    Our central banks have flip-flopped on interest rates so often with a predisposition to lower interest rates no wonder expectations for low interest rates persist.

    They have failed to deal with post-pandemic inflation while preserving over-valued assets purchased with free money * over the past two decades.

    We likely need interest rates around 7% to deal with inflation but I don’t see that happening anytime soon.

    Any market shocks (or black swan events) will result in an interest rate pause or lower rates almost immediately.

    I don’t expect much to change because most of the establishment in Canada is invested in real estate!

    *borrowing at well below historical average interest rates

  • Dirk 12 months ago

    Rising interest rates are partly driving inflation now, doesn’t anyone see that interest rates are no longer the right tool to combat inflation?

    • Tanya 12 months ago

      If the cost of goods is able to absorb interest into the price, it means interest rates aren’t climbing fast enough.

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