Rate Hike / Rate Pause – Data Shows Recovering with Canada Housing Accelerating Either Way

Published September 11, 2023 by Real Estate Leads

Just last week the Bank of Canada chose to hold their interest rate steady at 5%, and to say that’s a relief to many homeowners with variable rate mortgages up for renewal soon. The relief stretches beyond those folks too for sure, but we shouldn’t take our eyes off the reality that the BoC and its governor are obligated to keep inflation from turning into runaway inflation. We will do well to trust in their judgment, and it is just nice to see that at least this time their judgment lines up with the interests of homeowners who are increasingly spread too thin.

This is based on signs that the economy is cooling, although in discussing this we’d be remiss if we didn’t point out that the possibility of rate hikes later this year or early in 2024 are still a very distinct possibility. So as far as their anxiety is concerned homeowners may not be out of the woods yet, as the expression goes. But what’s important to note with a bigger-picture perspective on all of this is that there is solid market data showing that the housing market would be accelerating whether rates are going in one direction or the other.

This should be at least somewhat reassuring for those who’s livelihood is enhanced when there’s a vibrant housing market in the country, and of course that will include realtors and others first and foremost. For those who are keen to be in front of the curve then our online real estate lead generations system here at Real Estate Leads is very recommended. That out of the way, let’s continue with our topic here and explain more about why BoC interest rates aren’t factoring into the pace of home sales the way some would assume they should be.

6 of One

Only 3+ months back Canada’s housing market was showing further signs of recovery in May following a year long slump and creating a factor that many people foresaw as a potential impetus for the Bank of Canada to hike their interest rates. Canadian home sales had risen 5.1% from April to May and were up 1.4% year-over-year at that time, and that was the first increase on an annual basis seen in Canada in nearly two years.

The CREA’s home price index slide up 2.1% on the month, and yet was down 8.6% annually with national average selling price having increased 3.2% on the year. Sales gains seen through the first 5 months were buoyed by a healthy job market, increased population growth, and a reinvigorating of buyer enthusiasm with the overarching belief that the market cooldown was over.

Now of course, that data wouldn’t have supported the June 2023 interest rate hike on its own, and what’s interesting to note is that market conditions now don’t entirely support last week’s decision to leave the interest rate where it is. The central bank said that the speeding up with housing activity was among factors showing excess demand that was more persistent than had been foreseen given the current market climate.

The belief was that it would tighten up into July and August, and that’s exactly what it did. Creating something of an opposite reality, but not one that would prompt the housing market to decelerate.

Borrowers Sheltered from Higher Rates

What we’ve seen since then is far fewer homeowners being forced to sell homes they can’t afford to finance, and this has contributed significantly to recovery in the housing market after lenders gave temporary extensions to the amortization period variable-rate borrowers were needing to contend with. This sheltered them nicely from higher interest rates, and it’s something that they’re still continuing to do.

However, the increase in borrowing costs has led to a slowdown in residential construction activity and new housings starts across the country, and that part of it was inevitable. What this may do is impeded government plans to reduce the country’s housing shortfall and add to the recovery in home prices.

CMHC data has shown that housing starts have continued to fall every month since May of this year at a rate around 15 to 25% per month, and this indicates the unlikelihood of the 235K new housing starts envisioned actually happening.

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