Unexpected interest rate hikes put a damper on Canada’s home sales forecast

The two most recent consecutive increases in the Bank of Canada’s policy interest rate were not expected by most economists and other analysts.

The rate was raised by 0.25% to 4.75% on June 7 and a further 0.25% to 5% on July 12, following a decision to keep the rate at 4.5% for most of the year so far. In its justification, the Bank of Canada indicated that the increases were necessary due to excessive economic activity, which further exacerbated inflation.

As expected, the Canadian Real Estate Association (CREA) believes that the successive increases will have the effect of restraining home sales volumes. It has already lowered the forecast for home sales in 2023 and 2024 compared to the April 2023 view, along with a slide for prices. Activity is now expected to stabilize or pick up at a slower pace than in recent months.

Earlier this year, most analysts believed that the policy interest rate hike cycle had ended, and that the Bank would continue to hold the rate at 4.5% until at least late 2023. It was previously expected that the rate will begin to decrease probably in early 2024.

With the latest increase, according to CREA, there is a growing consensus that the rates will not only be higher, but probably longer – until 2024.

In real numbers, CREA now predicts a total of 464,000 home sales nationwide in 2023, which represents a 6.8% year-over-year decrease. Likewise, the national average home price fell slightly by 0.2% year-over-year to $702,409, which was higher from the previous forecast due to gains in Metro Vancouver and Greater Toronto, and a stronger-than-expected price growth in general throughout the country.

Home sales will rebound 11.2% to 516,000 units in 2024, with activity returning to historical averages and interventionist monetary policies relaxed. Home prices will increase by 3% between 2023 and 2024 to $723,000.

Before the rate hikes continued, home sales volumes were already slowing from a lack of supply, with new listings falling to a 20-year low.