Interest rates are working to moderate spending and inflation is easing gradually, though underlying pressures are proving persistent.
The Bank projects that inflation will stay around 3% through the first half of 2024, returning to target in 2025.
A surge in home sales across Canada’s largest markets to kick off 2024 is unlikely to prompt the Bank of Canada to delay its probable interest rate cuts later this year.
The start of the year has shown signs of a rebound in some major housing markets, including in the Greater Toronto Area, where home sales soared 37 per cent in January compared with the same month a year ago.
Last month’s 4,223 home sales also marked a 22.9 per cent month-over-month increase from December, according to data released Tuesday by the Toronto Regional Real Estate Board. It credited lower borrowing costs associated with fixed-rate mortgages that lured some buyers back to the market.
Other local real estate boards have also reported year-over-year increases in home sales activity last month: Vancouver sales jumped by 38.5 per cent, Calgary, by 37.7 per cent, and Montreal, at 18 per cent.
“Clearly, the mood in the market is starting to improve,” said Benjamin Tal, deputy chief economist at CIBC Capital Markets.
“The market is starting to internalize that interest rates have peaked.”
Tal said the main outstanding question is whether sellers will respond to renewed demand. If the housing market sees improvement in the number of new listings, this would prevent prices from rising too quickly over the next six months.
An unusual home sales rally in December has stoked speculation that the Canadian housing market may start to heat up even more. With prices still soft as the central bank signals that it’s done raising its benchmark rate, buyers are trying to find the best time to purchase property before more competition floods in and pushes prices back out of reach.
The psyche in the market has already started to shift. Canadians became more optimistic about home prices in November and that trend has steadily risen in the months since, according to a poll conducted for Bloomberg by Nanos Research.
It’s lured in buyers such as Maria Herrera, a 31-year-old manager at a Vancouver animation company. With the goal of snagging a two-bedroom condo, she recently jumped back into the market with her husband and agreed to buy a place in the suburbs in January after spending the past few years weighing a home purchase.
“I don’t think we’re the only ones who have saved for a down payment in the last three years,” Herrera said. “It will go back to people getting excited with the rates getting lower, and people just going a little crazy and going into a buying frenzy.”
Rising lending rates have had a notable impact on the housing sector, prompting potential buyers to search for more affordable housing options . Simultaneously, some potential sellers have refrained from listing their homes to avoid the consequences of higher rates . The decrease in new listings at lower price points has likely hindered overall sales activity, particularly as lower-priced properties contributed to declines in sales during 2023 . Despite a moderation from record-high levels, strong migration growth and a robust labour market have kept sales well above long-term trends .
While international migration has influenced rental markets, resulting in increased rental gains and heightened demand from investors, interprovincial migration from higher-priced markets in British Columbia and Ontario has helped support sales growth in the higher price ranges of our market, even in the face of higher lending rates .
The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.
The Bank now forecasts global GDP growth of 2½% in 2024 and 2¾% in 2025, following 2023’s 3% pace. With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025.
In Canada, the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024. Consumers have pulled back their spending in response to higher prices and interest rates, and business investment has contracted. With weak growth, supply has caught up with demand and the economy now looks to be operating in modest excess supply. Labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs being created at a slower rate than population growth. However, wages are still rising around 4% to 5%.
As anticipated, the Bank of Canada (BoC) opted to hold its policy rate steady at 5% on Wednesday. In a statement, the bank cited “growing evidence that past interest rate increases are dampening economic activity,” including with respect to housing, where demand has softened considerably.
Even so, in addressing the media following yesterday’s rate announcement, BoC Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers expressed that home prices have not responded to rate hikes in the anticipated or desired way.
“Normally, house prices move pretty lockstep with interest rate increases. Most Canadians buy houses with credit, so they’re one of the first things that respond to monetary policy,” said Rogers.
And while prices have indeed come down over the course of the hike cycle — the not-seasonally-adjusted, national average price has slipped from $796,000 in March 2022 to $655,507 last month — many month-over-month declines have been nominal. There were also a number of months where prices managed to rally and offset declines.
“Relative to the degree of rate increases, we’re not seeing the decline in house prices that we would expect,” continued Rogers.
“There is a structural lack of supply in the Canadian housing market. So, really, until we address that supply issue, interest rates on their own are not going to help us get back to a housing affordability situation.”
BoC staff also spoke to mortgage realities confronting Canadians on Wednesday, saying that the bank is “paying really close attention to the mortgage renewal cycle.”
“Basically it’s monetary policy at work. As more households renew their mortgage at a higher rate, it puts downward pressure on spending. They have less money available to spend on other things, that dampens demand, that sort of gets the economy back in balance,” said Rogers.
“We are watching for the financial pressure that comes with that. We usually talk about that more in our Financial System Review — we’ve got an update to that coming in November and you’ll hear more from us on that at that point.”
“Higher lending rates dampened housing demand this year, but thanks to strong
migration levels, housing demand remained relatively strong, especially for
affordable options in our market,” said CREB® Chief Economist Ann-Marie Lurie.
“At the same time, supply levels were low compared to the demand throughout
the year, resulting in stronger than expected price growth.”
Inventory levels were persistently below long-term trends for the city throughout
most of the year, averaging a 44 per cent decline over the 10-year average. We
also saw the months of supply remain well below two months throughout most of
the year across homes priced below $1,000,000.
The persistently tight conditions contributed to our city’s new record high price.
While the average annual benchmark price growth did slow from 12 per cent in
2022 to nearly 6 per cent growth in 2023, the price growth was still relatively
strong especially compared to some markets in the country.
As anticipated, the Bank of Canada (BoC) opted to hold its policy rate steady at 5% on Wednesday. In a statement, the bank cited “growing evidence that past interest rate increases are dampening economic activity,” including with respect to housing, where demand has softened considerably.
Even so, in addressing the media following yesterday’s rate announcement, BoC Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers expressed that home prices have not responded to rate hikes in the anticipated or desired way.
“Normally, house prices move pretty lockstep with interest rate increases. Most Canadians buy houses with credit, so they’re one of the first things that respond to monetary policy,” said Rogers.
And while prices have indeed come down over the course of the hike cycle — the not-seasonally-adjusted, national average price has slipped from $796,000 in March 2022 to $655,507 last month — many month-over-month declines have been nominal. There were also a number of months where prices managed to rally and offset declines.
“Relative to the degree of rate increases, we’re not seeing the decline in house prices that we would expect,” continued Rogers.
“There is a structural lack of supply in the Canadian housing market. So, really, until we address that supply issue, interest rates on their own are not going to help us get back to a housing affordability situation.”
BoC staff also spoke to mortgage realities confronting Canadians on Wednesday, saying that the bank is “paying really close attention to the mortgage renewal cycle.”
“Basically it’s monetary policy at work. As more households renew their mortgage at a higher rate, it puts downward pressure on spending. They have less money available to spend on other things, that dampens demand, that sort of gets the economy back in balance,” said Rogers.
“We are watching for the financial pressure that comes with that. We usually talk about that more in our Financial System Review — we’ve got an update to that coming in November and you’ll hear more from us on that at that point.”
As blowback for the Greenbelt land swap rages on, Premier Doug Ford announced a new $1.2B incentive program to get municipalities to build more homes.
Ford announced the new program, dubbed the Building Faster Fund, during his speech at the Association of Municipalities Conference in London on Monday, noting that it will “reward municipalities for reaching annual housing targets.”
“These targets will be ambitious, but realistic,” Ford said.
The Ontario Government has repeatedly asserted its intention to ensure the construction of 1.5 million new homes in the province by 2031, and has already doled out targets to municipalities. But with limited construction capacity, the ability to actually reach 1.5 million homes has been put into question.
On Monday, Ford said that, in the first year of the program, they are looking to achieve at least 110,000 new housing starts across the province. This is notably lower than the more than 150,000 housing starts experts estimate will be needed to reach the province’s goal.
Municipalities that reach 80% of their respective part of each year’s target will become eligible for funding “based on their share of the overall goal.”
“Think of it like this: if you get an ‘A,’ you become eligible for funding. If you do worse than an ‘A,’ you don’t,” Ford said.
