Lower rates of interest in 2023 could revitalize Canada’s housing market before the tip of the 12 months, in response to some economists, at the same time as the central bank warns the speed cut conversation is premature.
A report from Desjardins Economics released Thursday expects home sales in Canada to “reach a low within the second half of 2023 before lifting off again.”
Some provinces corresponding to Ontario and British Columbia should see a return to higher prices next 12 months because of this, the report argues, putting a “brake” on any improved housing affordability.
The revised market outlook points to a possible drop within the Bank of Canada’s benchmark rate of interest as driving the housing sector’s resurgence, in addition to strong demand from immigration and better purchasing power from robust household savings and a decent labour market.
The Bank of Canada signalled last month it will pause further changes to its policy rate while it lets its aggressive rate hikes from the past 12 months take effect.
The central bank’s own surveys released earlier this week show some market watchers expect rate cuts before the tip of the 12 months.
Governor Tiff Macklem pushed back on the concept after a speech in Quebec City on Tuesday, telling journalists: “It’s really far too early to be fascinated by cutting rates.”
“We’re pausing rate of interest hikes to evaluate whether we’ve raised rates of interest enough to get inflation all the best way back to focus on,” he said Tuesday. “The query is actually whether we’ve done enough. It’s not about whether we’re considering cutting rates of interest.”
But Macklem also conceded that the pause in rate hikes may need a stimulating effect on the sector, as buyers and sellers who’ve been on the sidelines waiting for the height of rates seize the temporary sense of clarity.
“The proven fact that we’ve paused may bring people back into the market. These are things we’re going to have to look at,” he said.
Randall Bartlett, Desjardins’ senior director of Canadian economics and one in all the report’s authors, tells Global News that the expected pause in rate hikes is already driving down some mortgage rates, opening the door for some prospective buyers.
When markets anticipate future cuts, that drives down longer-term bond yields, he explained in an email, which feeds into fixed-rate mortgage products.
Desjardins expects five-year fixed-rate mortgages on offer to proceed to drop because the Bank of Canada maintains its key rate, with variable-rate products following suit if and when cuts eventually begin.
“Falling borrowing costs needs to be a significant driver of the (housing market) rebound,” the Desjardins report says.
The Desjardins report notes the housing correction has already been pronounced: existing home sales are down 38 per cent from the height roughly a 12 months ago, with the common sale price down 20 per cent from the market’s latest highs.
There’s still further to go, the report’s authors argue, as high rates of interest will “proceed to weigh on housing market activity.”
“As such, there’s likely more pain ahead for Canadians, including a recession in 2023,” the report states.
For the Bank of Canada’s part, it said in a revised outlook last month that the housing market is anticipated to proceed cooling through to mid-2023 before rebounding barely.
Royal Bank of Canada’s assistant chief economist Robert Hogue, meanwhile, said in a note Tuesday that Canada’s housing correction appears to be “broadly easing.”
He said he expects the housing market to bottom out across the spring or summer, with the timing various from market to market.
“The recovery that may follow, nonetheless, is poised to be very gradual at first,” he wrote. “We expect the huge increase in rates of interest will proceed to carry back activity and compress purchasing budgets for a while.”
The Desjardins report also expects the housing correction and subsequent rebound will vary by province.
The report puts Ontario and B.C. in similar boats, classified because the “most vulnerable” to further corrections of their housing markets in 2023.
Ontario, as an illustration, is anticipated to complete 2023 with home prices down 25 per cent from their peak, with housing activity returning to pre-pandemic levels by the tip of next 12 months.
However the two provinces’ reputations as attractive hubs for immigration will “underpin” the recovery for his or her respective sectors, the report argues.
Quebec is meanwhile expected to see an additional 20 per cent decline in home sales before hitting a 10-year low, the report projects, before starting a gradual climb back up in 2024.
While Desjardins’ economists remark that the Maritime housing markets have shown some resiliency within the correction with little price decline through 2022, there is likely to be early signs of a downturn heading because the pandemic-related migration boom starts to wane.
Strong commodity activity and costs are expected to spice up economic output within the Prairie provinces, per the report, and the housing market should get a lift accordingly.
The relative affordability of Calgary, Edmonton and Winnipeg will make each city a pretty destination for immigration as well, Desjardins’ economists argue.
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