Real Estate Canada Reacts to Bank of Canada’s ‘wait and watch’ Approach

In March 2023, the Bank of Canada maintained its overnight rate target at 4.5%, which was in line with its earlier indications. The Bank emphasized its intention to keep the interest rate steady if economic conditions evolve, as projected in the most recent Monetary Policy Report. Real Estate Canada has been affected by fluctuating rates over the last year, leading to changes in both sales and prices.

Over the past year, the Bank of Canada raised its policy rate significantly, from 0.25% in March 2022 to 4.5% presently. This led to increased prime rates and variable and adjustable mortgage rates. The decision to raise interest rates was driven by high inflation, which peaked at 8.1% in June 2022, prompting one of the most forceful interest rate hikes in Canadian history. However, inflation has since moderated.

Economists had anticipated that the central bank would maintain its current interest rate level, given that it was too soon for another hike. Recent data showed that Canada’s inflation rate decreased to 5.9% in January, and the country’s economy experienced no growth in the fourth quarter. The Bank of Canada acknowledged that although the labor market remained tight, it expected it to loosen and wage growth to stabilize.

The Bank of Canada foresees Canada’s annual inflation rate decreasing to around 3% by mid-2023, mainly due to the effects of the base year. Canada’s inflation rate is expected to continue decreasing throughout the year, barring any unforeseen circumstances. The Bank noted that global economic developments generally aligned with its forecasts but warned that China’s economic recovery and the ongoing conflict in Ukraine posed “upside risks” that could result in higher inflation.

Like other sectors, the real estate market in Canada has also been impacted by changes in interest rates, with sales and prices responding to fluctuations in borrowing costs. In 2022, the Bank of Canada began raising interest rates, leading to a slowdown in home sales and a decline in prices in many markets.

Canada’s largest real estate board, the Toronto Regional Real Estate Board (TRREB), serves almost 70,000 licensed real estate Brokers and Salespersons in and about the Greater Toronto Area.

In its March 3rd newsletter, TRREB’s President Paul Baron said, “It has been almost a year since the Bank of Canada started raising interest rates. Home prices have dropped over the last year from the record peak in February 2022, mitigating the impact of higher borrowing costs. Many homebuyers have also decided to purchase a lower-priced home to help offset higher borrowing costs. The share of home purchases below one million dollars is up substantially compared to this time last year.”

Across the country, home prices have decreased over the last year, attributed to various factors such as changes in demand, supply, and economic conditions. However, it’s worth noting that lower-priced homes may also be more affordable and accessible to first-time homebuyers

The decline in home sales may be temporary, as there is evidence suggesting that buying has increased for 2023. However, this increased demand may face a challenge due to a constrained supply of home listings, leading to increased competition between buyers and price growth. This is especially true in real estate properties sought by first-time buyers who are facing increased rental costs.

Overall, these trends indicate a shift in the Canadian housing market and could present opportunities for first-time homebuyers to enter the market or for current homeowners to upgrade to larger or more expensive properties. However, it’s important to remember that the housing market can be influenced by many unpredictable factors, so it’s always a good idea to consult with a real estate professional for advice and guidance.

By Hema Chandrashekar

Sr. Content Editor, Save Max