Canadian Real Estate Might Get A Boost From BoC Pause, But It’s Unlikely: BMO

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…”

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  • Frank 6 months ago

    – The BOC has said most recently, it will monitor the housing market and adjust rates accordingly. The BOC is in effect causing inflation to rise by raising rates. Their only focus ahould have been inflation. Since they are causing it, it seems as though they are using yesterday’s tools for a new dynamic and are in effect lost , trying to regain credibility. At the expense of breaking the entire financial system. Tiff needs to be fired.

  • Dennis_K 6 months ago

    Even with a pause or decline in interest rates, I am not sure how any regular working person could afford a rise in real estate prices, even from today’s values. The Sept. 6th article on BD clearly indicated that even with a 30% price drop, Ontario would still remain ‘unaffordable’ (which I assume is relative to median incomes; and this is supported by the Housing Affordability Monitor published by the National Bank of Canada). Who’s paying these prices, and where is their money coming from?

  • Ray 6 months ago

    They’re here to collapse the system. These 2 and 3 % inflation numbers are all nonsense they spout on TV. Anyone shopping can tell you their groceries are above and beyond 3%.

  • Kate Wright 6 months ago

    It doesn’t matter. There’s almost certainly going to be a boost since lower income people scramble to get into a trend late. The question is how much of a boost, and will it be supported by the government?

    It wouldn’t be surprising if the Libs and NDP started to frame it as not giving poor people oversized mortgages is racial discrimination. That’s what the US did, right after developers bought into developing markets, and then needed to sell the housing back these people’s fams.

  • Canuck 6 months ago

    Speculators believe that excessive immigration will keep house prices up forever, but fail to understand that it also causes inflation to be extremely persistent, which forces BOC to hike interest rates and keep them high, coz if they don’t, inflation will spiral out of control, which is already starting to happen. The next decade is going to be nothing like the last one. Canadian speculators will have to find other productive endeavors than merely hoarding real estate and sitting on it hoping for lazy gains.

  • Canuck 6 months ago

    Most Canadian home buyers have no clue how rate hikes impact mortgage payments and still end up in crazy bidding wars, which they’ll later regret. For e.g. for a Million dollar mortgage (assuming the person qualifies in the first place) at last years 1.5% interest , the borrower would’ve paid 15k in interest to the bank each year, but now at 6 % he has to pay 60k per year just in interest not towards the principal !!If you see the amortization charts, these numbers barely change for the first 10 years. So in the first 5 years itself you now end up paying 300k now towards interest vs 45k paid previously!!! Also, this drives away speculators and houses stop appreciating as much as they used to. So you end up with an asset which does not make financial sense. Think before you make that crazy offer !!

  • Denise 6 months ago

    I’m appalled at the fact that the BOC governor, “Tiff,” still has a job. The man told Canadians that he would be keeping rates low until at least 2023, then blows up the economy with unprecedented IR hikes! Adding interest to interest and trapping people in their homes because they can’t even qualify for half their current mortgages because of the banks policies and qualifying practises. The man should be hung! He’s a liar and clearly terrible at his job! Who else could screw up this badly and keep their job?!

    • Jay 5 months ago

      BoC job is inflation/price stability. Housing was/is causing unsustainable borrowing. Just because he said X, doesn’t mean the “free market” data will follow exactly what he said it would do.

      If you want to pin point the exact cause of inflation – you can blame the central banks of the G7 for all their QE. Not just the BoC.

      More money = more problems when the supply chain cannot produce enough goods for a few extra trillions of money created overnight. Ta da – corporations and investors pile in to take out free money. The poor are left with the public debt.

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