Experts are concerned about the potential for the spring housing market to “overheat” as the Bank of Canada prepares to make its interest rate decision. The spring housing market, which typically kicks off in March, is currently showing a mixed picture. Some western markets, such as Alberta, have seen a strong uptick in home sales, while Toronto has experienced a decline in housing activity. Average home prices are on the rise in regions like the GTA following a correction in the market tied to the central bank’s rate tightening cycle in recent years.
Economists are observing a modest uptick in home sales and prices for the first quarter of the year, driven by pent-up demand in Ontario and British Columbia. However, many sidelined homebuyers are expected to continue to wait for a clearer sign of lower borrowing costs on the horizon. The Bank of Canada is also monitoring the spring housing market as it considers whether it has done enough to ensure inflation cools back to its two per cent target. The central bank is concerned about the potential for a rebound in the housing sector to push up shelter price inflation, which could delay the return of the Consumer Price Index (CPI) inflation to the target and necessitate longer restrictive monetary policy.
Recent economic data has been positive for the Bank of Canada’s inflation fight, with cooling annual inflation over the past two months. However, real GDP and job reports indicate some easing, with the unemployment rate rising to 6.1 per cent. If the Bank of Canada cuts its policy rate in the upcoming decision, it could prompt prospective buyers to enter the market. However, a potential overheating of the housing market could be counterproductive, leading the central bank to be cautious. The current environment has been described as a “coiled spring” effect, posing risks of higher-than-expected sales and prices.
While buyers have responded to cheaper borrowing rates during the current tightening cycle, most economists do not expect a rate cut from the Bank of Canada in the upcoming decision. It is anticipated that the central bank will hold its policy rate at 5.0 per cent, with potential cuts beginning in June or July. The lack of certainty about future interest rates from the central bank is also constraining buyers. However, there is speculation that this week’s decision could provide clearer signals about a possible rate cut timeline, depending on economic conditions and housing market trends.
TD Bank predicts that the housing market will pick up in the second half of the year once interest rate cuts begin. Sales and prices are expected to increase, but in markets constrained by affordability, price appreciation may be limited. Despite interest rate cuts, housing may not become significantly more affordable in the coming years due to rising prices offsetting improvements in affordability. Economists suggest that it will take a series of rate cuts over the next few years for more buyers to enter the market and make a real difference in affordability. Overall, the spring housing market and the Bank of Canada’s interest rate decision are closely intertwined, with both having an impact on the future trajectory of the housing market in Canada.
