A Look at the Spring Housing Market

It’s that time of the year: the birds are chirping, the buds are blooming, and the Bank of Canada (BoC) is on the brink of cutting interest rates. This is also the time of the year for a busy Canadian real estate market when prospective homeowners are searching for a new place to call “home.” Will this year’s spring housing market be a repeat of the past? It depends on whom you speak to.

Heading into the season, here is a snapshot of the February situation: national home sales tumbled 3.1 per cent month-over-month, the number of newly listed residential properties jumped 1.6 per cent, the national average home price is $686,000, and the five-year fixed mortgage rate is at about six per cent.

So, what is everyone saying with the country fully entrenched in springtime?

A Look at the Spring Housing Market

Speaking in an interview with the Financial Post, one economist warned that homebuyers are unlikely to stampede into the Canadian housing market this spring. Instead, the real estate industry will witness a “staggered” return of prospective homeowners, says Robert Hogue, assistant chief economist at Royal Bank of Canada.

Because mortgage rates remain elevated, multiple rate cuts will be needed to give homebuyers a “green signal” to purchase residential properties.

“We’re likely to see a bit more activity going forward, but more of a gradual ramp-up as opposed to a sharp snap-back this spring,” he said. “The correction phase may be over, and the next phase of it will depend on the perceptions and confidence or anticipation that things could get hotter.”

According to Marc Ercolao, an economist at TD Economics, Canada is poised to witness a “seasonally strong spring home-buying” season because of expected rate cuts by the central bank.

“The BoC will be watching the housing market as seasonally strong spring home-buying will fall directly in line with the expected timing of interest rate easing,” he said in a note.

The Bank of Montreal (BMO) believes that housing market conditions this spring will be uncertain because of the many variables.

Kavcic added, “It’s also worth reminding that this is Canada: we have winter, and it can be variable and messy.”

Ultimately, it is unclear if the housing market will wait for monetary authorities to pivot on interest rates or scoop up spring lists, says Larry Cerqua, the Chair of the Canadian Real Estate Association (CREA).

“After two years of mostly quiet resale housing activity, there’s a feeling that things are about to pick up,” Cerqua said. “At this point, it’s hard to know whether buyers are going to wait for a signal from the Bank of Canada or whether they’re just waiting for the spring listings to hit the market. Either way, neither of those are likely too far off.”

BoC Fears Overheating Spring Housing Market

At the March policy meeting, the Bank of Canada kept the policy rate unchanged at five per cent where it has been since July. While the futures market is pencilling in a rate cut in the next couple of months, the central bank is engaged in a balancing act: cut rates now and risk an inflation revival or leave rates higher and risk an economic downturn.

The other factor monetary policymakers fear is overheating the spring housing market.

BoC head Tiff Macklem told reporters that he and his colleagues are monitoring how the Canadian housing market is functioning. With everyone anticipating rate cuts, the market is already showing signs of accelerating.

“We know everybody would like to see lower inflation and lower interest rates. So would we,” Macklem added. “But we need to balance the risks of keeping monetary policy this restrictive for too long against the risks of lowering prematurely and jeopardizing the progress we’ve made.”

Indeed, shelter, mortgage interest rate costs, and rent prices are keeping inflation above the BoC’s two per cent target.

That said, with real estate experts saying that buyers are ready to make that leap once interest rates fall, the concern is that this could ignite another buying frenzy wave comparable to what occurred during the coronavirus pandemic.

Economists argue that easing inflation supports the case for rate cuts. In February, the annual inflation rate fell to 2.8 per cent, down from 2.9 per cent in January and below the consensus estimate of 3.1 per cent. Core inflation, which removes the volatile food and energy components, also slowed from 2.4 per cent to 2.1 per cent.

On the broader economic front, the monthly gross domestic product (GDP) has risen for three consecutive months, including a preliminary February reading of 0.4 per cent. While Canada’s labour market continues to be tight, it is showing signs of softening.

Like the nation’s neighbour to the south, monetary policy officials are trying to fight inflation without engineering a hard landing scenario or triggering another round of inflationary pressures. It won’t be easy.