Q2 Respite from Interest Rate Hikes Made Detached Homes Soar

After a year of rising interest rates, the Bank of Canada (BoC) slammed the brakes to kick off the second quarter, leaving its benchmark policy rate at 4.5 per cent. Officials wanted to take a break, assess the economy, and see how rate hikes were impacting the broader economic landscape.

But while there was some optimism that the April 2023 rate pause was the beginning of the central bank ending its quantitative tightening cycle, the institution perturbed a broad array of people and pulled the trigger on two more rate hikes in June and July, lifting the terminal rate to five per cent.

What will Governor Tiff Macklem and the rest of the BoC do in September? This is the $64,000 question. For now, opinions are mixed.

Tu Nguyen, an economist with accounting and consultancy firm RSM Canada, told The Canadian Press that there is unlikely to be a need for the central bank to continue raising rates unless there is a significant external shock in the national economy.

“The bank’s goal is eventually to restore price stability, to taper an overheated economy. Their goal is not to incur a recession. So it looks like the bank is achieving their goal,” Nguyen said in an interview with the newswire. “They’re certainly going to continue monitoring the data because there has been quite a lot of noise. The reason why I’m fairly confident that this is the end of it is we don’t expect spending to really go up towards the end of the year.”

However, Elston Ash, the executive vice president at RE/MAX Canada, thinks the hotter-than-expected inflation print in July could force Macklem and Co. to pull the trigger on another rate hike.

“With inflation coming in hotter than expected in July, the Bank of Canada is forecast to raise rates yet again in September,” says Elton Ash, Executive Vice President, RE/MAX Canada. “If that holds true, home-buying activity will likely remain subdued for the foreseeable future. However, we believe that once stability returns to housing markets across the country, momentum should build again as buyers take advantage of improved affordability levels. We expect the tide will turn. It’s only the timing that is still to be determined.”

The annual inflation rate rose to 3.3 per cent in July, up from 2.8 per cent in June and higher than the consensus estimate of three per cent. The core consumer price index (CPI), which omits the volatile energy and food sectors, was unchanged at 3.2 per cent but came in higher than the market forecast of 2.8 per cent.

Whatever happens in the rest of 2023, it is evident that the Bank of Canada is near the end of the current hiking cycle, and this is a positive for the Canadian real estate market, experts say. In fact, the country’s housing sector witnessed what happened when there was a single month of a rate pause.

Q2 Respite from Interest Rate Hikes Made Detached Homes Soar

When the central bank skipped a rate hike, it allowed the conventional five-year mortgage rate to hold steady at 5.75 per cent in April and May. This presented a brief opportunity for homebuyers.

According to the RE/MAX Hot Pocket Communities Report 2023, demand for affordable detached homes surged in the second quarter, particularly for residential properties below the $2 million price point. In the first and second quarter, sales for detached homes surged in several Greater Toronto Area (GTA) markets, including Dufferin County and York Region. The same robust sales activity for detached residential properties was ubiquitous in the Greater Vancouver Area, like Coquitlam, Delta-South, the Gulf Islands, and North Vancouver.

Interestingly enough, even with strong demand, approximately 93 per cent of detached homes recorded a drop in values in the first half of 2023 compared to the same time a year ago. But the declines were not sharp for many places, as 43 per cent of housing markets kept their valuation decreases to single digits.

But will this trend persist?

“We’re at a crossroad, and the biggest question remains, where do we go from here?” says Ash.

New data from the Canadian Real Estate Association (CREA) show that home sales were strong in July, rising 0.7 per cent month-over-month and 8.7 per cent year-over-year. Moreover, home sales were up in more than half of all local markets, except in the GTA and Fraser Valley.

Of course, more supply coming online and sales levelling off have created a more balanced market. That said, sales and price growth are beginning to respond to the Bank of Canada’s July rate hike, industry experts say.

“Sales and price growth are already showing signs of tapering off further in August in response to the Bank of Canada’s mid-July rate hike and messaging regarding above-target inflation for longer than previously expected,” said Shaun Cathcart, the senior economist at CREA. “We’re probably looking at another round of ʻback to the sidelines’ for some buyers until there’s a higher level of certainty around interest rates going forward.”

All eyes will be on the September meeting and if Tiff Macklem will signal more rate hikes to come or a prolonged environment of five per cent interest rates. The good news is that most of the BoC’s work is done, so an additional 25 basis points might not break any part of the economy.