Chief economist on a market that seems to be heating up – and what the Bank of Canada might do next
Canada’s housing market is still “too hot for comfort” according to BMO Financial Group chief economist and managing director Doug Porter (pictured), who said that a further cooling-off would be welcome as long as it doesn’t become a “harsh and dramatic slowdown.”
Speaking with Canadian Mortgage Professional, Porter said the fact that the market has slowed in recent months should be taken in the context of the unprecedented homebuying surge at the beginning of the year, with current activity still well above its pre-pandemic level.
“Yes, it has ‘cooled off’ from the madness of earlier this year, but I think the key word in that sentence is ‘madness,’” Porter said. “What we were seeing back in February and March was simply beyond unsustainable.
“Even with the so-called cooldown in recent months, sales are still at a level that we’ve never seen before, at least prior to the pandemic. By any definition, the market is still incredibly hot and incredibly tight, and the pressure will squarely be on prices to continue to rise unless something changes.”
While market activity across the country has stabilized somewhat in recent months, there’s still little end in sight to the eyewatering price increases that have taken place since the beginning of the pandemic.
According to real estate platform Wowa, the average sold price in Canada continues to creep up, with September’s national figure up 14% over the same time last year and significant monthly increases also recorded in Ontario cities such as Mississauga, Ottawa and Hamilton.
Across the country, house prices are expected to ramp up even further in the remainder of the year, with RE/MAX forecasting a 5% national increase before the end of 2021.
Those reported trends of recent weeks were a worrying sign, Porter said, even if there could be an element of Canadians moving quickly to avail of record-low rates that won’t be around for much longer.
“We’re seeing the market starting to heat back up again in some cities,” he said. “Now, it could be that buyers are basically rushing to beat possible mortgage rate hikes, so this reheating could prove to be temporary.
“But regardless, I think the key point here is the market is still at exceptional levels of tightness and prices are very, very hot.”
The cities that are surging
While much attention is inevitably focused on Canada’s largest urban areas, Porter said that those cities in the next tier down – the likes of London and Windsor in Ontario and Chilliwack in British Columbia – have recorded some of the most worrying price increases in recent times.
According to the Windsor-Essex County Association of Realtors, the average sale price in the region has skyrocketed by nearly 32% over the past year, with the Canadian Real Estate Association (CREA) showing the average price in London is up 27% year-over-year.
In Chilliwack, meanwhile, the yearly change in home prices as of October sits at a stunning 37%, according to the Zolo agency, with the city recording a particularly sizeable increase between August and September.
“This is where the affordability issue is really spreading out in many areas of the country,” Porter said. “It’s not an issue everywhere, but it’s an issue in a lot more places than just Toronto and Vancouver now. Given the ongoing imbalance between demand and supply, the market definitely still favours sellers.”
In light of those surging prices, Porter reiterated his view that further supporting the already “super-charged” demand in the Canadian housing market would be an unwise move where the federal government is concerned, even in terms of removing roadblocks for first-time would-be buyers.
“I personally don’t believe it’s very helpful now to further support demand, even if it is for first-time buyers,” he said. “Our concern is that any support for demand will ultimately just lead to even higher prices and basically be counterproductive, so we would not recommend any policies to support demand at this point.”
What next for the Bank of Canada?
The right way to go about cooling the market, Porter said, was to increase interest rates – a move the Bank of Canada took a step towards last week by announcing that it expected hikes to its benchmark policy rate to begin by mid-2022.
There’s been some speculation that the Bank might further revise that projection and shift it towards the beginning of the next year, particularly with financial markets pricing in rate increases as early as January.
Porter said that while he couldn’t rule out that scenario entirely, it was unlikely – although the possibility of rates increasing by more than a quarter-point per hike also couldn’t be discounted.
“I have a hard time believing the Bank is going to go that quickly – I can’t rule it out, but it certainly is looking like they could be starting to hike rates by April,” he said. “There’s nothing to say that they can’t move more quickly than a quarter percent per calendar year, which is what we’ve been assuming.
“But there have been times in the past when the Bank has moved more quickly than that. Let’s face it: if we’ve got a really serious inflation issue on our hands, they’re not necessarily constrained.”
That said, such a scenario is probably an “outside risk”, according to Porter, with the Bank likely to prioritize quarter-percent increases per calendar quarter. “I still believe the Bank certainly doesn’t want to shock anybody,” he said.