New stats show a further gain in home sales and prices but policymakers are managing a delicate rate balance
After the BoC announced its latest interest rate decision last week, deputy governor Paul Beaudry noted several pieces of evidence that suggested inflation would remain elevated.
“Specifically, strong demand for both goods and services, a tight job market and signs of a rebound in the housing market all highlight persistent inflation pressures in the Canadian economy,” he told the Greater Victoria Chamber of Commerce.
The third of these points just got worse with the latest statistics from the Canadian Real Estate Association.
It revealed Thursday that home sales grew more than 5% between April and May (following double-digit growth in the previous month) with a 1.4% increase in activity (not seasonally adjusted) year-over-year.
"The rebound has been evident for a number of months at this point, but May really drove the point home with year-over-year comparisons for both national sales activity and national average home price back in positive territory," said Larry Cerqua, Chair of CREA.
The MLS Home Price Index climbed 2% month-over-month but was still down almost 9% year-over-year. The actual (not seasonally adjusted) national average sale price posted a 3% year-over-year increase in May.
BoC intervention?
These figures will add more fuel to the expectation that the BoC will hike again in July, especially if incoming jobs data also confirms a continued tight labour market.
“With our forecast for economic growth being upgraded, we expect the BoC will hike rates again in July to 5.00% as it enters this trial-and-error stage of fine tuning the policy rate,” said TD Economics in a new economic forecast.
Of course, part of the reason why home sales picked up in April and May (and to a lesser extent in earlier months too) was the perception that rate hikes were on hold. Future data will reflect how 4.75% with anticipation of 5% will impact sales.
"A rebound in housing activity this year was never really in doubt because we knew the demand was there – the only question was around timing and that was answered this spring," said Shaun Cathcart, CREA's Senior Economist. "The 2023 housing puzzle piece that was less obvious was the reluctance of existing owners to take advantage of a slower market to make a move because they don't want to mess with the ultra-low fixed rates they locked in during the COVID-19 pandemic.
Supply challenges
While rate hikes will have an impact on sales, the supply of homes for sale remains a key issue.
With some lenders helping out pressured homeowners by extending amortization periods for variable rate mortgages, there has been some shelter from the storm of rate rises, but this won’t hold off budgeting problems for ever.
Additional forced selling could be seen ahead, but this supply will do little to address the longer-term issue of low availability. The latest CREA stats show the number of newly listed properties rose almost 7% month-over-month but is still historically low.
“Without existing owners supplying the market with new listings, this housing demand rebound may play out more acutely than might have been expected on the price side this year," added Cathcart.
