Higher Bank of Canada interest rates have put downward pressure on Canada’s real estate market since the summer, following a brief spring rebound, according a new report from TD Economics.
TD economist Rishi Sondhi pointed to the central bank’s decision to end a four-month period of stable interest rates by hiking in June and July. During this period, Sondhi said the central bank was “maintaining a bias towards additional hiking.”
The Bank of Canada hiked rates by 25 basis points in both June and July, bringing the policy rate to five per cent. Since then, the central bank has held interest rates at five per cent.
“These hikes are hitting a market that was already down,” Sondhi wrote in the report published on Thursday. “National sales have pulled back by about five per cent, partially retracing the moderate rally this past spring.”
The report highlighted that sales remain below pre-pandemic levels by around 12 per cent and reduced sales have occurred alongside increases in new listings.
“This second leg down in activity has been minor compared to the 40 per cent plunge in sales observed from the early part of 2022 through the beginning of this year,” Sondhi wrote.
The report said Canada’s sales-to-new listings ratio fell to about 51 per cent in September from just under 70 per cent in April, representing a change to softer market conditions.
On the supply side, the report said new listings increased for a six-month period ending in September, which marked a 35 per cent increase. Sondhi noted that because the starting point was low, listings “had only returned to their long-term average.”
“Ontario forms an important exception, as listings have leapt even higher to levels that are notably above long-term averages, possibly indicating that higher rates are impacting supply via pressures on homeowners.”
The supply increase drove the sales-to-listings ratio down to 40 per cent, Sondhi highlighted, which is the lowest level since the global financial crisis.
The report highlighted key regional differences, including that sales and average prices have declined significantly in Ontario and B.C. since the Bank of Canada resumed interest rate hikes earlier this year.
“These are two markets where affordability has recently breached historical worsts,” Sondhi wrote in the report.
However, “decent affordability conditions” have spurred growth in sales and prices across the Prairies as well as Newfoundland and Labrador, the report noted.
“These diverging regional trends mark a break from the remarkable synchronicity observed across provinces for much of the last three years,” Sondhi wrote in the report.
New listings are likely to rise throughout 2024, the report said, though it cautioned that weakness in sales and prices could cap growth in that area.
“Historically, when sales and home prices weaken, supply typically tends to follow suit, with would-be sellers moving to the sidelines to wait out the turbulence,” Sondhi wrote in the report.
Sondhi expects home sales and average prices to decline in the fourth quarter of 2023 and into the first quarter of 2024 as higher interest rates continue to weigh on the sector.