Canadian real estate sales are picking up but prices haven’t budged, and they aren’t expected to in the near future. BMO Capital Markets believes the Great Canadian real estate stagnation may have just kicked off. Despite a sharp cut to interest rates and normalization of buyer volumes, prices are still moving sideways. Those expecting a rocket-like recovery are in for disappointment. The bank warns that prices remain too high, and the lack of affordability will throttle demand—even with falling interest rates.
The Great Canadian Real Estate Stagnation Kicks Off
The hype around falling interest rates have so far failed to materialize into real movement. Headlines have been focused on the annual uptick in sales, but they remain historically weak. At the same time, prices have barely budged despite interest rates making a sharp drop. In fact, home prices moved slightly lower over the past year.
Forecasts expecting a rapid recovery of the market “next year” are starting to surface for a third year in a row. However, it’s hard to tell if that’s optimism or delusion right now. ”There are clearly signs across the country that the worst of the correction is behind us, but the case for a trampoline-like rebound is also a tough one,” explains Robert Kavcic, senior economist at BMO.
Canadian Interest Rates Are Falling. Mortgage Rates? Not So Much
Why haven’t rate cuts driven a larger boost to home sales and prices? It’s natural to assume it would have, especially when combined with policymakers spending hundreds of billions on stimulus to boost housing activity.
“Ultimately it comes down to affordability and, at current price levels, mortgage rates haven’t sunk quite far enough to tip the calculus. With 5-year fixed rates now in the low-4% range, even three more BoC rate cuts this year would only bring variable rates down to similar levels,” says Kavcic.
The Bank of Canada (BoC) policy rate is being closely watched by the real estate industry. However, short-term rates only impact short-term borrowing costs. In this case, only variable rate mortgages are impacted by rate cuts, but fixed-term mortgages are influenced by bond yields. As the bank points out, fixed rate mortgages are already much cheaper. That means the rate cuts aren’t providing more credit capacity, they’re only boosting sentiment.
The bank uses Toronto as a key example of how the market isn’t playing out as expected. Prices in the region are down 1.8% from last year despite an uptick in home sales. At the same time, new listings are up 20.2% from last year, “… leaving the market balance still softer than at the start of the year, despite BoC easing,” notes the bank.
For those thinking, “well that’s Toronto!” Fair point. Canadian real estate is experiencing regional variations, with some markets doing better than others. However, as the financial capital and most expensive market in the country, prices in the region serve as a de facto upper bound for the market. Halifax may be a lovely city, but it will have a hard time seeing valuations trade at par without significant development of its industry.
“If what you see is what you’ll get for mortgage rates this year, it might lead to a stable/flat/rangebound/[insert your favorite adjective here] market in 2025…,” adds Kavcic.