Rate hike uncertainty muddies real estate market outlook

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Listings for houses for sale are trickling into Toronto-area neighbourhoods as real estate prices recover, but an air of restraint is settling over the market.

Andre Kutyan, broker with Harvey Kalles Real Estate Ltd., has noticed a hesitation among buyers since the Bank of Canada raised a key interest rate in early June.

While the rate hike of 25 basis points is small, the psychological effect is greater than the financial impact, he says.

Some potential buyers are also waiting to see if the central bank will tack on another increase at the next meeting of policy makers in July.

“I think buyers anticipate another rate hike will soften prices more.”

On the day the policy makers were scheduled to meet, no buyers scheduled appointments to view his new listing for a detached house in Bedford Park until late afternoon.

“There was not a single showing Wednesday morning when everyone was glued to their TV or their phone to see what’s going on,” he says.

Mr. Kutyan listed the house with an attention-grabbing price of $1.995-million. He set a date for reviewing offers and expected the property to sell above asking because the neighbourhood has highly-ranked schools that draw families.

Three buyers submitted bids for the three-bedroom house at 87 Glengarry Ave., which sold for $2.41-million.

While the sellers sold for a premium, Mr. Kutyan says the action was less intense compared with previous weeks.

“All of a sudden, there’s a change,” he says of the current mood.

Photographers, stagers and home inspectors are less busy, he says, as buyers tread carefully.

“They’ll wait and see what happens with the rates,” he says.

Some homeowners were encouraged to list in late May and early June by tales of improving prices, he says, with a rush of new properties coming on after the Victoria Day weekend.

But he points out that sellers who were holding out for a rebound in prices may not be farther ahead if they need to purchase another property because it’s likely that will have risen as well.

Mr. Kutyan says the spring market was sluggish to begin with and he expected that late start to keep momentum going through the summer.

“Now I’m second guessing that.”

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The recovery in house prices in Canada will likely continue for the rest of 2023, although the gains may come at a slower clip, predicts Olivia Cross, assistant economist at Capital Economics.

Ms. Cross expects higher interest rates and economic weakness to weigh on real estate, but the drop that pulled the composite house price index of the Canadian Real Estate Association down 15 per cent from peak-to-trough is likely in the past, she says.

The turnaround in the housing market is a big concern for the Bank of Canada, Ms. Cross says, because rising house prices feed directly into shelter prices and will quickly put upward pressure on inflation.

Capital Economics is forecasting that the Bank of Canada will hike its benchmark rate by 25 basis points in July, which would bring the policy rate to 5 per cent.

Ms. Cross doesn’t expect another increase to stamp out the recovery in house prices. Most buyers taking out a mortgage will likely opt for a fixed rate, and the rise may be more moderate than the increase in variable rates, she adds.

On a national level, home sales in May jumped 5.1 per cent from April, according to the Canadian Real Estate Association. Sales rose in about 70 per cent of local markets, CREA says, including the Greater Toronto Area, Montreal, Greater Vancouver, Calgary, Edmonton and Ottawa.

The laggards included Hamilton, Guelph, Ont., and Windsor, Ont.

Compared with May, 2022, national sales edged up 1.4 per cent. While the increase was tiny, it marks the first time since June, 2021 that sales increased on a year-over-year basis, CREA notes.

CREA’s senior economist Shaun Cathcart points out that one puzzle in the market this year has been the reluctance amongst existing homeowners to take advantage of the slower market to make a move to a different property. Mr. Cathcart says many owners don’t want to mess with the ultra-low mortgage rates they locked in during the pandemic.

New supply was still running at historically low levels in May, he says, and that in turn is likely pushing up prices more quickly than expected.

The national average home price stood at $729,000 in May to mark a 3.2 per cent rise from May, 2022 and the first year-over-year gain in 12 months.

Bank of Nova Scotia economist Farah Omran says the magnitude and speed of the recovery in national sales points to resiliency and strong household finances, but it also poses additional challenges for the Bank of Canada as it tries to slow down the economy and bring inflation back to its 2 per cent target.

The continued strength in May suggests real estate may stop being the drag on growth it had been for much of the last year, she adds. The May data may have contributed to the central bank’s latest decision to hike but the impact of that move will take time to show up in the numbers, she adds.

Ms. Omran says the central bank’s hike lifted borrowing costs directly for those with variable-rate mortgages but also indirectly for those taking out mortgages with fixed rates because those were also pushed higher by the bond market following the announcement.

The central bank also signalled that its pause in increasing rates may be over, which in turn may thwart speculative buying by people who have been counting on rates stabilizing and declining sooner than is currently the case, she says.

The combination will help slow down the reheating in the housing market, which the economist believes is necessary.

“The Bank can ill afford to have the most rate sensitive part of the economy roar back,” she says, pointing out their aim of slowing growth and bringing inflation back to target.