Canadian real estate prices are back to surging after a correction that barely lasted a year. However, the momentum carrying prices higher isn’t expected to last very long after the latest Bank of Canada (BoC) rate hike. RBC, the country’s largest bank, expects rising interest rates will throttle demand at a time when more supply is finally beginning to appear. The result will be a much more balanced market, helping to calm the credit-driven price growth that re-appeared with easing central bank expectations.
Canadian Real Estate Prices Have Been Surging Since The BOC “Pause”
Canadian real estate prices have been launching higher over the past few months. The national Home Price Index (HPI) saw the benchmark rise 2.1% in May, but remain 8.5% lower than last year. Over the past two months, prices have climbed a whopping 4.1%—about $30,000 higher. That’s not just a few exuberant cities, but the price of a typical home across Canada rose by nearly the annual post-tax income of an employed person within two months.
“The Bank of Canada merely pausing its interest hike campaign earlier this year appears to have rekindled demand in a material way this spring,” explained Robert Hogue, assistant chief economist at RBC.
However, he expects recent changes in the market will temper home price growth again. Let’s take a quick dive into those factors.
Canadian Real Estate Inventory Is Finally Improving, But Not Enough (Yet?)
Shortly after the central bank’s pause notice, buyers returned to the market with a huge budget increase. Home sales climbed 5.1% in May, with RBC noting the volume is just 6% below the seasonally adjusted volume in February 2020. In other words, interest rates are more than double the level, but sales are only a few points below the level they had been prior to the stimulus.
Inventory problems are (finally) beginning to ease, but the market is still seeing excess demand. New listings jumped 6.8% last month—much bigger than the 5.1% increase in sales. This helped to lower the pressure, but RBC still estimates the sales-to-new listings ratio at 68%, about 8 points higher than a balanced market. Supply needs to rise, demand needs to cool, or a combination of both to help stabilize the market.
“Spurts of new listings across the country eased demand-supply conditions in the majority of markets last month,” said Hogue.
Adding, “But not enough to tip the scale in favor of buyers. In fact, sellers continue to hold the stronger hand at this point, which is why prices have been appreciating lately.”
Canadian Real Estate Price Momentum Will Slow Soon
Canada’s largest bank doesn’t see the recent price momentum continuing for very long. “Our view is that the current strength in the market is unlikely to be sustained through the remainder of this year,” said Hogue.
“The Bank of Canada’s (mildly) surprising rate hike in June and the prospects for further monetary policy tightening are likely to temper the pace.”
The overnight rate typically only impacts variable rate mortgages, but the June hike also helped drive expectations for bond yields. This will drive fixed term mortgage rates higher, lowering leverage and throttling funding. That can reverse the recent surge in home prices that resulted from falling mortgage rates after January’s “conditional pause” announcement.
The market currently expects at least two more hikes to the overnight rate later this year.
