The Bank of Canada opted to hold its policy rate steady at 5% earlier this month, but one economist is warning that September’s rate pause probably won’t do much for housing market recovery in the near term.

“We all know that it’s hard to keep this market down, but the headwinds are stiffer than they were the last time the Bank of Canada stepped aside,” BMO Economist Robert Kavcic wrote in a market update on Friday.

While September’s pause “will help market psychology,” says Kavcic, he points out that we’re now in a more balanced (and less competitive) market than was observed earlier this year and contributed to the resilience of the spring market.

Citing the latest figures from the Canadian Real Estate Association, Kavcic draws attention to the fact that the number of newly-listed homes edged up 0.8% month over month last month. As well, he says, “there are a record number of housing units under construction that will continue toward completion, some of which will be flipped onto the resale market.”

By contrast, the spring market was characterized by tight demand-supply conditions, brought on in large part by the fact that new listings (in March) were at the lowest since 2003.

“The tightening of the market was as much a result of less supply as it was buyers coming back into the market,” explains Kavcic. “The short takeaway was that homeowners didn’t want to, or have to, sell into a down market.”

Kavcic also notes that the spring market benefitted from mortgage rate relief.

“The market was actively expecting a recession and pricing in Fed and Bank of Canada rate cuts in the second half of the year. Both two and five-year GoC yields were down more than 60 bps from the start of the year by March, and that translated into shorter-term fixed mortgage rates falling comfortably below 5%.”

Now, however, there is no such relief in sight.

“Both yields are barely off their 16-year highs, and the Bank’s still-hawkish talk helped keep the market from rallying. That leaves the lowest available mortgage rate today (typically 5-year fixed) about 100 bps higher than the lowest that was available (two- to three-year fixed) in the spring.”

With the bank raising rates to a 22-year high this summer, the pressure being feltby current mortgage holders is at a crisis point. Calculations from the BoC show that around 35% of mortgages were subject to renewal as of mid-2023 relative to the start of 2022 — and that proportion is on track to escalate to 50% by the end of this year, and 65% by the end of 2024.

“Our simulations show that the payment shock is becoming more severe the deeper into the renewal cycle we go,” says Kavcic. This could translate into forced sales across Canadian markets, at a time when the buyers simply aren’t there.

Kavcic isn’t alone in thinking that housing market recovery in Canada is a long way off. RBC Economist Robert Hogue cautioned earlier this month that a rebound akin to what we saw in the spring will hinge on interest rates coming down, which certainly isn’t anticipated any time soon.

In fact, Statistics Canada’s latest inflation reading — it showed that the Consumer Price Index edged up 4% year over year in August, up from 3.3% in July — muddies the waters for the central bank, and may even tempt another rate hike in October.

“We think the fall season may look a lot like August with buyers staying on the defensive in many parts of Canada despite more choice becoming available to them. High interest rates, ongoing affordability issues, and a looming recession are poised to pose major obstacles,” says Hogue. “Any material acceleration in the recovery will have to wait until interest rates come down in 2024.”

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