Canada’s real estate market shows signs of cooling due to interest rate hikes

Last month, Canadian home sales reported their largest decrease since June as growing interest rates started cooling the red-hot housing market.

According to the recent report by the Canadian Real Estate Association (CREA), national home sales were down by 5.4% in March on a monthly basis. The number of new listings showed almost the same drop. Nevertheless, benchmark prices were still up by 1% from February and by 27% from a year ago.

The report says real estate sales fell by 16% from March 2021, when the market activity reached an all-time record level.

“We can definitely see that the market is softening, as home sales and price growth pace begin to show signs of cooling,” – Robert Kavcic, an economist at Bank of Montreal, noted.

The extreme house prices gains Canada has seen during the previous two years are facing a significant test at the beginning of the traditional spring selling season.

Borrowing costs are going up, while other attempts by policymakers to reduce demand are causing more difficulties for buyers who are already priced out of the market. Since the beginning of March, the central bank has raised its key lending rate by 0.75%, and it’s expected to push it up by another 2% over the next year.

Meanwhile, Kavcic doesn’t think the markets will feel the full influence of higher borrowing costs until the second half of 2022.

The national real estate market remains historically tight, with almost no changes in the sales-to-new listings ratio, that reached 75.3%, exceeding long-term average numbers. According to CREA, almost two-thirds of local markets were seller’s markets. In addition to it, monthly sales were also more than 10,000 units higher than the results of the previous decade.

At the same time, Phil Soper, president of Royal LePage, believes the market slowdown is less caused by rate hikes than by “the affordability issue that comes from several years of extreme home prices gains.”

“These rate hikes still don’t lead us to the rates we’ve seen in 2019, so we haven’t returned to the pre-pandemic levels,” – he noted.

In March, Canada’s average not seasonally adjusted housing price reached $796,000 (US$631,000).

Another report by Canada Mortgage and Housing Corporation shows that developers started work on an annualized 246,243 units last month, which is down by 1.6% on a monthly basis.