Canadian real estate experts are torn on the impact of the latest central bank move. Last time the Bank of Canada (BoC) paused interest rate hikes, home prices surged. BMO warns not to expect a replay after the latest BoC pause. The economy is in a very different place these days, and most importantly—unlike last time, there’s no mortgage rate relief on the horizon.
Canadian Real Estate Surged On A Pause & Fell On Rate Hikes
The BoC pause earlier this year resulted in an almost immediate end to the real estate correction. Greater Toronto real estate prices tend to lead the market, so it’s an ideal example. The region saw the benchmark price jump 9.4% between the pause and its end in June 2023. A rate hike is almost enough to break the exuberant mindset, and return buyers to the sidelines.
“Since the BoC moved off the sidelines and raised rates twice, before Wednesday’s pause, price growth has fully stalled, or resumed correcting in some areas,” explains Robert Kavcic, a senior economist at BMO.
Toronto real estate resumed its pull back after a second interest rate hike. Seasonally adjusted home sales show a 1% contraction for August, and the benchmark pulled further back.
Source: BMO; CREA.
Why Did Home Prices Rise During The Last Pause & Will It Repeat?
Understanding the basics of monetary policy are important to understand what’s happening. A central bank’s primary, and in the case of the BoC—only duty, is managing inflation. To hit its target, its most important tool is interest rates. When inflation is too low, interest rates are lowered to stimulate borrowing. By stimulating excess demand, prices make a non-productive increase (a.k.a. inflation). If inflation is too high, rates are raised to throttle credit demand, and reduce consumption to slow price growth.
If interest rates reached this restrictive level in January, home sales wouldn’t have surged. It’s a hard limit, and doesn’t just loosen in the event of a pause. That’s a sentiment shift—exuberant buyers weren’t restricted by the high rates. They anticipated a drop in prices, and went on the sideline as well, since no one likes to buy assets falling in price.
The latest BoC pause has many people expecting demand to resume, along with higher prices. BMO isn’t entirely convinced it’ll be the same this time around.
Canadian Real Estate Prices Won’t Reinflate On This Pause
Canada’s economy isn’t as robust as it was during the last pause, according to BMO. “The latest pause by the BoC might help market sentiment (again), but the headwinds are stiffer than they were in the spring,” explains Kavcic.
He cites more inventory and a softer job market as two major differences this time around. Most important are mortgage rates, and the potential for “relief” from higher rates.
“Indeed, the lowest fixed-rate mortgage available today (typically the 5-year), is roughly 100 bps higher than the best option (shorter-term fixed) that was available during the spring bounce,” he explains.
Adding, “this all suggests that we won’t see the same forceful bounce this time around…”