Achi news desk-
Fears that the spring housing market could “overheat” will be in the background as the Bank of Canada prepares for its interest rate decision on Wednesday, experts say.
The spring housing market, which begins in March, is usually one of the busiest times of the year for Canadian home buyers and sellers.
So far, the spring housing season is a “mixed picture,” according to RBC assistant chief economist Robert Hogue, as the Bank of Canada’s benchmark interest rate remains high and put some potential buyers off.
Preliminary data from local housing boards shows that some western markets, particularly in Alberta, saw strong increases in home sales in March. In Toronto, housing activity has declined for two consecutive months.
Meanwhile average house prices are rising in some regions including the GTA after a market correction linked to the central bank’s rate tightening cycle over the past few years.
“In some parts of the country, that recovery appears to be relatively robust,” Hogue told Global News. “Prices are rising, but not that fast.”
Rishi Sondhi, an economist with TD Bank, said in a housing market report released Monday that the first quarter of the year was “tracking stronger than expected.”
Unseasonably warm weather helped get housing activity off to a hot start in January and February, he noted, and some of those early sales pulled demand ahead of the typically busy spring season. The long Easter weekend at the end of March also reduced overall sales in that month, he said.
Like Hogue, Sondhi said he expects a “modest” increase in home sales and prices this spring, driven by strong demand in Ontario and British Columbia.
But both market watchers tell Global News that they expect many homebuyers on the fringes to maintain their payment patterns until they get a clearer signal of lower borrowing costs down the road from the Bank of Canada.
Worried that the housing market could ‘stock’ inflation
The Bank of Canada, too, has made it clear that its eyes are on the spring housing market as it assesses whether it has done enough to ensure that inflation will continue to cool all the way back to its target of two the percent.
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In the discussions released after the central bank’s latest interest rate cut in March, monetary policymakers expressed “concern that the housing market continues to pose downside risks to the inflation outlook.”
Although headline inflation cooled to 2.8 per cent annually in February, shelter inflation has remained a thorn in the side of the Bank of Canada, remaining above six per cent in the month. Although the sheltered component of the consumer price index (CPI) includes inputs such as rents and mortgage interest costs linked to the central bank’s own policy rate, it also factors in house prices.
So a hot housing market “could reduce shelter price inflation,” the Bank of Canada warned in March.
“If the housing sector rebounds in the spring, shelter price inflation could be pushed up, delaying the return of CPI inflation to the target (two percent),” read the discussions. “If inflation proves more persistent than expected, it is likely that monetary policy would need to remain restrictive for a longer period.”
But recent economic data has been largely positive for the Bank of Canada’s inflation battle.
Annual inflation data has cooled more than expected in two consecutive months. Although real gross domestic product to begin 2024 has been hotter than expected, the March jobs report released on Friday showed a relative easing, with the unemployment rate jumping to 6.1 percent.
If the Bank of Canada cuts its policy rate on Wednesday, potential buyers would likely come off the sidelines, Hogue said. A spring cut could give Canadians and market watchers expectations that the central bank’s rate-cutting cycle “could be a little more aggressive” than currently anticipated, he said, sparking a bit more market activity.
Such a scenario would be inconsistent with the Bank of Canada’s goal to avoid a re-acceleration of price pressures, Hogue said.
“If the housing market were to overheat again, that could be counterproductive. So (the central bank) is aware of that. “
There is currently a “coiled spring” effect in the housing market, Sondhi wrote in his report, which poses a risk that sales and prices could rise higher than in TD Bank’s current forecast.
Even during the Bank of Canada’s current tightening cycle, buyers have driven selling activity higher in response to cheaper lending rates in the market. That happened last spring when the Bank of Canada announced a “conditional pause” in its rate hike campaign and at the end of 2023, with bond yields declining and fixed mortgage rates falling in response.
Sondhi told Global News in an interview on Monday that the market is “responsive” to these positive demand developments.
Rate cuts are expected to skip the spring housing market
But neither Hogue nor Sondhi have a rate cut from the Bank of Canada this week in their baseline housing outlook.
Most economists expect the Bank of Canada to keep its policy rate steady again at 5.0 percent on Wednesday, with calls for cuts to start in either June or July.
Hogue says the central bank likes to mark its pivots well in advance, which would make Wednesday’s change of stance premature. But he adds that the latest economic data may allow the Bank of Canada to be a little clearer that “an inflection point is imminent in its monetary policy.”
In addition to the dampening effect of higher interest rates, Sondhi said a lack of certainty from the Bank of Canada about the direction of interest rates is another factor limiting buyers. He agreed that this week could see the central bank provide clearer signals about the timeline of a potential rate cut, something monetary policymakers have so far been tight-lipped about.
“The economic conditions we see are supportive of cuts so they may open the door to that possibility in their statement in April,” he told Global News.
But Hogue also cautions against expecting a clear direction from the Bank of Canada one way or the other. Monetary policymakers will want to “keep some options open” should inflation pick up, or if housing market trends are hotter than economists currently anticipate, he said.
“If the market doesn’t behave as we expect and starts to jump up very quickly and overheat, it could make the Bank of Canada take a step back and reassess its game plan,” Hogue said.
TD Bank expects the housing market to pick up in the second half of the year after interest rate cuts began in July. Sales and prices are expected to increase, according to the forecast, but in many markets – especially those most constrained by affordability – price appreciation will be limited.
Even when interest rate cuts begin, Sondhi said he does not expect housing to become meaningfully more affordable over the coming years as cheaper borrowing costs fuel rising prices, offsetting improvements in affordability.
As for Hogue, he says it won’t be until the end of 2024 and into 2025 that more buyers come off the sidelines, empowered by interest rate drops of one to two percentage points over the next few years.
“A drop in interest rates will help affordability and it will bring more people, more buyers into the housing market,” Hogue said.
“But it will need a series of cuts before it makes a real difference to many people.”
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