The Impact of Recent Interest Rate Increases on Canada’s Resale Housing Market

Question 1: The Weight of Interest Rate Hikes on Canadian Resale Markets

Canada’s housing market, which rebounded this past spring, is now facing renewed challenges. Since the summer of 2023, the resale activity has been under strain, significantly due to the Bank of Canada (BoC) resuming its interest rate hikes after a four-month pause. In June and July, the BoC enacted rate increases, coupled with indications of further tightening on the horizon. The situation was compounded by a steep rise in the 5-year Government of Canada bond yield, which surged approximately 130 basis points over the past six months to reach a multi-year high of around 4.2%.

These hikes have hit a market already in decline. National home sales have pulled back by about 5%, partially unwinding the moderate rally observed earlier in the spring, now sitting roughly 12% below pre-pandemic levels. This downturn, however, pales in comparison to the staggering 40% plunge from early 2022 to early 2023.

Market Balance and Listings

A noticeable shift in market balance has occurred, particularly evident in sales juxtaposed against a significant uptick in new listings. The Canadian sales-to-new listings ratio—which indicates market tightness—has dropped from nearly 70% in April to just 51% in September, marking the softest condition since July of the previous year.

Interesting regional disparities have arisen. Most provinces show sales-to-new listings ratios at or above long-term averages, with the notable exceptions of British Columbia and Ontario, where sales have plummeted and price declines have been most pronounced. These regions are grappling with severe affordability issues. Conversely, provinces like Alberta, Manitoba, and Saskatchewan are benefitting from better affordability conditions, leading to increased sales and prices.

Analysing the Supply Side

New listings in Canada have surged over the last six months by 35%. However, due to a historically low starting point, these listings have only returned to long-term averages. Ontario stands out, with listings soaring past its long-term average. This oversupply has driven the sales-to-listings ratio down to 40%, the weakest level seen since the aftermath of the Global Financial Crisis.

Within Ontario, the weakness has been rampant across several municipalities, including Toronto and its adjacent markets. In stark contrast, Northern Ontario appears to maintain more balanced housing conditions.

Question 2: Outlook for 2024—Will Regional Divergences Continue?

As we look through 2024, new listings are expected to continue rising, albeit marginally. Job market resilience, despite economic growth slowdowns, is predicted to restrain forced sales. Employment levels are anticipated to remain relatively stable, serving as a buffer against potential sales increases.

Sales and prices are forecasted to decline further through early 2024, with the possibility of achieving approximately 10% and 5% lower levels, respectively. Yet, starting in the second quarter of 2024, both metrics should begin to rebound, primarily driven by anticipated interest rate cuts from the BoC.

Provinces like Newfoundland and Labrador and those in the Prairies are positioned for price growth due to favorable affordability conditions. Meanwhile, more pronounced declines are expected in Ontario and British Columbia with hopes for stabilization towards mid-2024.

Question 3: Evaluating Investor Activity

In an intriguing twist, investor activity is a pivotal aspect of the current housing market dynamics. As of early 2023, investors accounted for a notable 30% of home purchases—a figure significantly exceeding the average of 22.5% observed historically. While this might seem to bolster demand, it simultaneously reduces available opportunities for traditional buyers.

Interestingly, despite rising costs and interest rates, investor interest appears persistent. However, there’s concern about this sector’s sustainability, particularly as potential cash-flow negative situations loom, especially in competitive markets like the Greater Toronto Area (GTA). If interest rates begin to decline, investor activity may stabilize, subsequently energizing demand from other buyer groups.

Question 4: Homebuilding Trends Across Canada

The question of homebuilding momentum takes center stage amid ongoing population growth in Canada. Current data indicates that housing starts remain strong, exceeding pre-pandemic levels by approximately 20%. However, completion timelines have lengthened, exacerbated by regulatory hurdles and a shift towards more complex construction projects.

This ongoing building rush is a critical response to Canada’s ballooning population, expected to expand by over a million people this year alone. However, experts warn that the current pace of homebuilding may not keep up with this demand, potentially leading to housing shortages looming from 2023 to 2025.

Question 5: Government Responses to Housing Challenges

Amidst the pressing issue of housing affordability, governments have initiated various measures to tackle these challenges. At the municipal level, areas like Edmonton and Vancouver have altered zoning regulations to promote greater density, while provincial governments like Ontario are implementing recommendations aimed at alleviating housing shortages.

The federal government’s recent decision to eliminate the Goods and Services Tax (GST) on purpose-built rental constructions reflects a significant policy shift towards stimulating the rental market. While these initiatives are steps in the right direction, experts argue that auxiliary measures may still be necessary to surmount existing barriers and achieve long-term affordability.

Conclusion

Canada’s resale housing market is navigating a complex landscape influenced heavily by recent interest rate increases. Despite notable regional divergences and emerging challenges in affordability, both housing activity and government responses suggest there’s potential for recovery. Looking ahead to 2024, understanding these dynamics will be crucial for stakeholders across the market. The balance of supply, demand, and investor activity will ultimately shape the future trajectory of the Canadian housing market in an evolving economic climate.