Bank of Canada leaves spring housing market in 'holding pattern'

News not all bad as central bank signals possibility of rate relief in June

Those hoping that interest rate cuts would boost Canada’s spring real estate market will have to wait a little bit longer after the Bank of Canada once again held rates at five per cent on Wednesday.

However, it wasn’t all bad news for housing, as some dovish language from the central bank suggested that stronger-than-expected economic data would not derail the possibility of a cut this year.

“The bank’s hold certainly is not helping the spring market,” Toronto-Dominion Bank economist Rishi Sondhi said Wednesday following the announcement, noting that his team foresees a subdued spring season amid uncertainty about rate cuts. “We think this will keep the market in a bit of a holding pattern.”

Bank of Canada Governor Tiff Macklem did say a rate cut in June is “within the realm of possibilities,” though the bank was also careful to stress that it wanted to see continued evidence that inflation remains in retreat.

Earlier this month, the Toronto Regional Real Estate Board had expressed high hopes for the spring market, after inventory levels rose in March.

“Homeowners may be anticipating an improvement in market conditions in the spring, which helps explain the marked increase in new listings so far this year,” TRREB Jennifer Pearce said. “Assuming we benefit from lower borrowing costs in the near future, sales will increase further, new listings will be absorbed, and tighter market conditions will push selling prices higher.”

The debate over when rates will start to drop and just how far they will fall is now being pushed back toward the latter half of the year. TD Economics had already pegged July as the most likely first cut, though it does not believe the country’s most expensive housing markets — Ontario and British Columbia — will see an immediate benefit.

“Accordingly, a pickup in Canadian home sales and average prices is expected in the second half of this year. At the same time, tough affordability conditions in several markets should limit overall average home price gains,” the bank said in a recent housing market outlook report.

While economists and housing experts are now debating whether rate cuts will begin in June or July, there are still factors that could derail those timelines.

A Wednesday inflation report from the U.S. Bureau of Labor Statistics showed consumer prices rose more than expected, with continued strength in rents.

Despite the expectation of a slowdown in inflation based on leading indicators, progress has largely stalled over the past nine months, affecting U.S. bond yields.

Sondhi noted that Canadian bond yields tend to follow increases in U.S. yields, which can make the interest rate environment more challenging for buyers in Canada.

“If this uptick in bond yields filters through to mortgage rates, that would be yet another factor that would be in line with our view that the spring selling season, at least, is going to be subdued,” Sondhi said.

Source: Financial Post