Interest rates and borrowing costs may be surging – but Canadian home prices are continuing to rise at a rapid clip, according to new data.

The latest Teranet–National Bank composite index showed that average prices in the country’s 11 largest census metropolitan areas increased by 1.8% between June and July excluding adjustments – their second strongest monthly increase ever and the index’s fifth monthly jump in a row.

Halifax, Hamilton, Vancouver, and Toronto accounted for the largest proportional monthly growth, a sign that buyers are still eking out opportunity despite tight market conditions and steeper qualifying challenges.

The rise in new listings was a particularly noteworthy trend in July’s housing market, RBC economists Robert Hogue and Rachel Battaglia said in a recent report, with sellers “stepping out of the sidelines in every region of the country.”

Hamilton saw new listings spike by 15.2%, with Kitchener-Waterloo posting a 21.2% surge, London jumping by 19.9% and Toronto, Calgary, and Ottawa all recording single-digit increases.

Nonetheless, those increases arrived “from exceptionally low levels at the start of the year,” Hogue and Battaglia noted, meaning that they “merely reset the bar closer to normal in most instances.”

Have chances of a housing market crash receded in Canada?

The prospect of a severe downturn in the Canadian economy has yet to materialize, and still-robust employment figures indicate that a housing market crash is not currently into the cards, according to the interim chief executive officer of the Appraisal Institute of Canada.

Keith Lancastle (pictured top) told Canadian Mortgage Professional that with the unemployment rate having ticked only slightly upwards in recent months, a full-scale meltdown did not appear likely.

“Even with the slowdown in the economy, we’re not seeing job losses,” he said. “And we know that job losses are typically the thing that starts to trigger people defaulting on mortgages and exiting the housing market. Canadians will go without a lot of things before we don’t pay our mortgage.

“We’ll cancel our Netflix and our Disney Plus before we go short on the mortgage; we’ll sell the car before we go short on the mortgage. So we have a slowdown, but so far the slowdown has not resulted in a significant increase in unemployment.”

Why home prices are unlikely to plummet

Resilient demand will also be boosted by high levels of immigration, Lancastle said, meaning that while activity may not surge, a sizeable reduction in home prices is unlikely to transpire.

“There are some forecasts that are talking about contraction in some of the major markets, but it seems to be in markets where there was a lot of gain during the pandemic,” he said.

“And in fact, in most of those markets, from what I’ve seen it looks like we’re still basically at pre-pandemic levels. If you see a big increase in unemployment, that would be a harbinger of a more pronounced retraction in terms of pricing – but I think the absence of that is probably a suggestion that we’re going to see at least a moderate contraction, if anything.”

It’s also important to apply nuance to particular regions, Lancastle said, with certain areas within those regions seeing higher activity than others – and the popularity of specific property types also rising and falling.

“You can’t even use Southern Ontario as a single market,” he said. “You’ve got the GTA [Greater Toronto Area], which is going to be different again to a place like Peterborough, which saw huge gains. Then you have to further say, ‘Well, where’s the contraction in the GTA? Was it in the condo market? Is it in single-family homes? Is it in the higher-priced stuff or is it in the mid-priced or more entry-level stuff?’

“That’s the biggest thing. You have to look at not only prices, but also the amount of transactions to truly understand [the market].”

Source CMP
By Fergal McAlinden

Taking all current indicators into account, an interest rate cut by the Bank of Canada is not likely to happen until at least early 2024, according to Avery Shenfeld, managing director and chief economist at CIBC Capital Markets.

This is because while the overall inflation trend might see a considerable decline over the next few months, other factors like food prices are likely to become more influential in the very near future.

Food prices are a major component in the central bank’s new core inflation measures, “which will keep those running above a 3% annualized rate for now and prevent the bank from trimming rates until early next year,” Shenfeld said in a recent analysis.

“While policymakers can do little about it at the micro level, groceries play an important role in setting inflation expectations, which could still lead to a wage-price spiral,” Shenfeld said.

Pandemic-era pent-up demand continues to fuel this uncertainty.

“Statistics Canada stated within its latest retail sales report that some households were shifting from traditional grocery stores to favour lower cost bulk distributors,” Shenfeld explained. “These are all signs of a change in behaviour amid pressure on household finances from inflation and rising interest rates which could signal a reduced ability for companies to pass on cost increases in such rapid price hikes.”

Still, overall spending patterns might pave way for a return to normalcy in terms of household spending behaviour. Shenfeld said that rate cuts might take place as early as Q1 2024, coinciding with headline inflation easing ever close to the central bank’s 2% target.

“Unless concerns regarding the US economy escalate, or the unemployment rate rises in such a way that reduces the prospect of a wage-price spiral, we are not likely to see the bank cutting interest rates this year,” Shenfeld said. “Inflation relief may be a 2023 story when looking at true underlying trends, but rate relief may have to wait until 2024.”

Source CMP
By Ephraim Vecina

A “relatively dovish” statement by the Bank of Canada yesterday (December 6) suggested that the central bank’s rate-hiking path is at an end, according to CIBC deputy chief economist Benjamin Tal (pictured top).

The Bank left its policy rate unchanged for a third consecutive decision, with few surprised by a statement that arrived amid cooling inflation, rising unemployment and an expected economic contraction.

Once again, the Bank reiterated its willingness to raise its benchmark rate if required to continue bringing inflation lower – but that’s mainly an effort to dampen consumer expectations and keep the prospect of a rapid economic rebound in check, according to Tal.

“They have to keep mentioning that they will toy with the idea of raising again,” he told Canadian Mortgage Professional. “Otherwise, the market will react too aggressively, and they don’t want that. But overall, [the announcement was] not a big surprise whatsoever, and a relatively dovish statement – basically suggesting that the Bank is done.”

The central bank said it was “still concerned” about risks to the inflation outlook, a comment Tal said was designed to dispel the notion that its work on bringing down the consumer price index (CPI) was already done.

“I think the last thing they want is the long end of the 10-year rate, the five-year rate, to go down dramatically,” he said. “If they basically declare victory, you will see a situation in which the long end of the curve will go down [significantly], and that’s something that will sabotage what they’re trying to do. So they must keep us guessing.”

What’s the economic outlook after the latest Bank of Canada decision?

The Bank’s decision to leave rates unchanged in three successive announcements – and Governor Tiff Macklem’s unexpectedly dovish remarks on interest rates in recent weeks – have ramped up speculation about when it might be prepared to begin bringing its policy rate back down again.

Tal said it’s unlikely to touch rates until May or June, after which it will start cutting – with that trendsetting rate potentially set to fall by around 150 points by the end of the year.

Still, things are likely to remain challenging on the housing and mortgage fronts for the coming months, he added, with little prospect of an immediate upswing despite the Bank’s decision to pause.

“I think that the next few months will be difficult,” he said. “I think we’ll see more supply coming. We’ll see more new listings coming. Clearly, sales are down dramatically – so we’re entering a situation in which we are in a buyers’ market with no buyers, if you wish. The way I look at the situation: It will take a few more months before we start to stabilize.”

Canada’s housing market is “vulnerable” and facing a significant test, according to Tal – perhaps its most significant since the 1991 recession, which saw GDP tumble by 3.4% from peak to trough over eight quarters.

“Now, the current situation is not even close to the 1991 situation, but clearly it is a test,” he said. “And I think that with supply rising in the resale market and sales down, there will be more downward pressure on prices, especially in the condo space where we see supply rising of existing units.”

With interest rates having spiked over the past 20 months, scores of Canadian borrowers are facing much higher costs at renewal than the contract rate they originally took out.

That’s a reality that puts an even greater onus on the central bank to start bringing rates down next year, Tal said.

“If you’re renewing your mortgage now, an average extra payment is about 20%, 22%, so clearly it’s already starting,” he said. “I think that if the Bank does not cut during the course of 2024, the damage would be much more significant. We’d see delinquency rates rising fast.

“Now, there will be a shock, but I think that [with] the Bank of Canada cutting in 2024 and continuing in 2025, the shock would be manageable.”

2024 set to see muted economy amid continuing high rates

The gloomy outlook for the economy is expected to stretch into 2024 with a ”semi-recessionary” pace likely to prevail in the coming quarters, although there’s room for optimism beyond that.

“I don’t see any change – consumer spending is down, investment is down. The housing market is in recessionary territory, [and] per capita GDP is already down,” Tal said. ”I don’t see anything change anytime soon – but I think that the second half of the year will be much better.”

Another sign that things are progressing in the right direction for the Bank of Canada: the labour market, squeezed extremely tight for much of this year, is seeing a return to some degree of normality.

“If you look at the unemployment rate, it’s basically almost back to where it was – if you look at vacancy rates, back to the 2008 level,” Tal said. “So clearly, the labour market is normalizing – and that’s a good thing.”

Source CMP
By Fergal McAlinden

Decision makers at the Bank of Canada could be weighing up possible interest rate cuts in 2024 – but they’re sure to be keeping a close eye on developments south of the border as they consider a timeline for rates to come down.

Signs of a slowing economy, including easing core inflation and a gross domestic product (GDP) contraction in the third quarter, appear to suggest Canada’s central bank can now turn its attention away from possible further hikes and towards lower rates in the coming 12 months.

However, the US economy remains an important factor in the Bank’s decision-making process, according to Dominion Lending Centres chief economist Sherry Cooper (pictured top), particularly with the US “driving the bus” when it comes to long-term interest rates.

The recent marked decline in the Government of Canada five-year bond yield has been a direct result of a US bond rally – but Cooper also said the Canadian central bank won’t necessarily move in lockstep with the US Federal Reserve when it comes to rate decisions in 2024.

“In the US, house prices are rising quite significantly and the US economy is a lot stronger than the Canadian economy,” she told Canadian Mortgage Professional. “So it’s possible that the Bank of Canada will begin to lower interest rates prior to the Fed doing so.”

BoC still likely to push ahead with rate cuts

Earlier in the year, the Bank of Canada decided to hit pause on its benchmark rate while the Fed continued on the rate-hiking warpath.

The Bank hastily reversed that course over the summer, introducing back-to-back rate hikes to curb an unexpected housing market revival – but recent indicators suggest the economy has cooled sufficiently to justify pushing ahead with rate cuts in Canada, Cooper said.

“I think that the economy is now slow enough in Canada and inflation pressures are continuing to decline,” she said, “so there’s a very good chance that we’ll see the Bank of Canada begin to cut the policy rate as well ahead of the Fed, and probably in the first half next year.”

The Bank of Canada diverging from the Fed in the spring was flagged as a potential cause for concern by some observers who emphasized its potential to harm the Canadian dollar against the greenback.

Still, the prospect of the Canadian central bank forging its own path on interest rates in 2024 is likely an unproblematic one, Cooper said, with little chance of drastic rate cuts that might spook markets or pummel the loonie.

“There isn’t a big risk, because the Canadian economy has weakened and is weaker than the US – and our economy is far more interest-sensitive than the US economy because people can’t lock in mortgage rates for 30 years,” she said.

“Those are two fundamental factors that would argue for the Bank of Canada lowering rates more aggressively than the Fed. Having said that, though, I do not believe that they’ll take rates down to pre-COVID levels. That is very unlikely.”

Hopes rise for ‘soft landing’ on both sides of the border

The US economy has also slowed in recent weeks, with lower consumer spending, employment figures and cooling inflation all suggesting it’s beginning to lose steam.

While economic growth for the third quarter in the US was revised upwards to an annual rate of 5.2%, Q4 is expected to see further moderation – and treasury secretary Janet Yellen indicated last Thursday (November 30) that she believes significant further monetary tightening is not required to get inflation back on track.

That raised hopes that the US could be set to achieve a much-vaunted “soft landing,” by which the Fed would cool the economy enough to bring inflation back close to its 2% target without risking a sharp downturn.

Canada, too, could be on course to avoid a steep recession. The economy contracted by 1.1% in Q3 compared with the previous year, according to datareleased by Statistics Canada last week – but it avoided the technical definition of a recession thanks to revised April-to-June figures that showed growth of 1.4%, compared with the originally announced 0.3% drop.

Source CMP
By Fergal McAlinden