What happens next in Canada’s housing market?

The Bank of Canada's latest rate pause isn’t set to see activity pick up, chief economist says

What happens next in Canada’s housing market?

During the spring, the Bank of Canada’s decision to hit pause on interest rate hikes helped trigger something of an unexpected resurgence for the national housing market, with buyers stepping off the sidelines as rates finally stopped climbing.

In May, an RBC report indicated that the spring months were beginning to look like a “turnaround point” for home sales in Canada, which had surged by 11.3% month over month in April in the strongest such increase for almost three years.

That uptick in activity was most apparent in Canada’s two traditional housing market hotbeds, Toronto and Vancouver, where buyers were “quickly regaining confidence,” RBC said, in light of the central bank’s pause on rate increases.

After resuming that rate-hiking path in a hurry over the summer with two 25-basis-point jumps amid a stronger-than-expected economy and resilient inflation, the central bank has now decided to stay put in its last two announcements, leaving rates untouched in September and October.

Could that new pause spur another flurry of activity in the housing market before the end of the year – or are rates simply too high for another market upswing to occur?

BMO chief economist Doug Porter (pictured top) says the latter is likely the case. “Our view is that the housing market has not completely digested the latest rising rates as well as the run-up in long-term bond yields, which is being reflected in longer-term mortgage rates,” he told Canadian Mortgage Professional last week.

Indeed, there’s likely to be more pain ahead for homeowners, with current high rates and projected milder activity set to see home prices take a further dip in the months ahead.

“Our view is that combined with some underlying slowdown in the economy, that’s likely to keep the housing market tame for the next six months,” Porter said. “There’s probably another [downturn] in prices nationally, essentially reversing the run-up we saw in the spring and earlier summer. We would expect prices to drop back towards the lows that they hit earlier this year.”

TD Economics’ forecast, meanwhile, is for prices to slip by 5% through the final quarter of 2023 and into the first three months of the new year before recovering next spring.

Economist Rishi Sondhi said it would likely be 2025 before Canadian home sales “sustainably surpass” their levels from prior to the pandemic.

Surging population ‘keeping the flame’ under Canada’s housing market

One factor behind the fact that Canada’s housing market hasn’t experienced a deeper correction: rising immigration, with the Bank of Canada noting in its October announcement that housing demand was seeing a boost because of the population “surge”.

That trend is easing labour market pressures in certain sectors while also adding to consumption, the central bank indicated – and on the housing front, that rapidly growing population is “pretty clearly juicing demand,” according to Porter. “It’s pretty clearly keeping the flame under the housing market,” he said.

Similarly, RBC’s Hogue and Carrie Freestone signalled in a research note in August last year that immigration was a prominent reason for Canada’s avoidance, to date, of a housing market meltdown.

“Immigration and shrinking households are among the forces that will bolster Canadian housing demand, and protect against a full-blown housing crash,” the economists wrote.

Why Canada is likely to avoid a full-scale housing market crash

Households across the country have been shrinking for decades, Hogue and Freestone said, ramping up the number of new housing units required. In addition to the hundreds of thousands of new permanent residents set to arrive in Canada in the coming years, the number of Canadian households is projected by RBC to spike by 730,000 next year over 2021, resulting in the addition of 240,000 new households a year.

The strength of that demographic demand for housing means that despite the recent steep housing downturn, Hogue and Freestone believe “though this cycle has yet to fully play out, it’s unlikely to morph into the type of prolonged spiral observed in the US during the 2008 financial crisis.”

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