How are high rates continuing to impact Canada's housing market?

Executive on the 'logjam' impact of steeper borrowing costs

How are high rates continuing to impact Canada's housing market?

The rapid rise in interest rates witnessed over the past 16 months has created a “logjam” effect in Canada’s housing market, with buyers hesitant about pulling the trigger on a purchase and sellers reluctant to list.

That’s the view of RE/MAX Canada president Christopher Alexander (pictured top), who told Canadian Mortgage Professional that higher rates meant many would-be sellers were content to stay in their current property for the time being as buyers also moved to the sidelines thanks to squeezed purchasing power.

Alexander was speaking days before new figures by the Canadian Real Estate Association (CREA) revealed sales activity across the country remained largely unchanged between June and July, ticking down slightly by 0.7% on a month-over-month basis.

“I think there’s a number of factors at play,” he told CMP. “What’s been really evident this year is that there’s a compounding effect happening in the marketplace where you have reluctant buyers and reluctant sellers, and it’s causing a logjam of inventory.

“There are people that want to move, but they’ve got really good interest rates and they’re looking at what it’s going to cost them on a monthly basis if they upgrade. They’re holding back on listing. And then you’ve got buyers that are kind of playing the game as well.”

Still, continuing “situational” demand – for instance, from those who need to move because of marriage, family growth, or downsizing – is contributing to stable prices, Alexander said, with home values rising across many markets.

Indeed, the MLS Home Price Index continued to climb in July, rising by 1.1% on a monthly basis, with average prices down by a mere 1.5% year over year despite last year’s sales slowdown.

Housing market recovery likely to vary by region

Despite some encouraging signs, Alexander emphasized that activity is likely to continue varying on a market-to-market basis.

“There’s demand out there,” he said. “Buyers, generally speaking, have accepted that this is the interest rate environment. We took the biggest hit on pricing last year, and since January things have really started to climb again. But we’re going to be in this low-transaction, low-inventory environment for the foreseeable future.”

Calgary, a market that’s hit the headlines in recent times for its affordability and popularity among out-of-province buyers, is “absolutely rocking,” according to Alexander, with the Saskatchewan and Winnipeg markets also performing well.

The executive also pointed to continuing high levels of immigration as a factor that’s likely to spur healthy demand across the mortgage and housing markets.

“The big thing is going to be immigration – where are those people going to land, and is interprovincial migration going to continue the way it’s been going?” he said.

“From everything I can see, I don’t see why it wouldn’t. People have a strong desire for homeownership in Canada, and I don’t see that changing anytime soon.”

How will the Bank of Canada’s approach impact the housing market?

Of course, much will depend on the path ahead for the Bank of Canada, which has raised its trendsetting interest rate 10 times since March of last year in a bid to curb inflation that hit a 39-year high in summer 2022.

The latest consumer price index (CPI) figures show that inflation crept to 3.3% in July, up from 2.8% the previous month, in a development that brings the figure out of the Bank’s target range.

A further rate hike in September would undoubtedly prove an unpopular move, but while Royal Bank of Canada believes the central bank is still likely to hit pause on rate increases in that decision, it also indicated the Bank “is clearly willing to hike interest rates further if needed.”

The housing market’s underlying indicators are positive, Alexander said, even if the overall outlook is clouded somewhat by a chronic lack of supply.

“People really want to own real estate in Canada, and we’ve seen some pullback in the recreational markets. At certain price points under $1 million in Ontario and BC it’s really, really good,” he said.

“So I think the demand picture is still there. It’s not like people don’t want to buy – it’s just there’s still a bit of a standoff between buyers and sellers.”

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