Bank of Canada Maintains 5% Interest Rate Amid Housing Supply Shortage

The Bank of Canada has implemented a second “conditional pause” in its interest rate policy, maintaining a rate of 5% after a series of ten consecutive increases. Finance expert Rubina Ahmed-Haq discussed this decision with interviewer Antony Robart, noting that the central bank has observed smaller declines in home prices than initially expected. This is attributed to a persistent structural shortage of housing supply, a perspective echoed by Stephen Brown from Capital Economics and other economists who are predicting further market downturns.

Data from the Canadian Real Estate Association indicates that home prices fell by 18% from March 2022 to January 2023, followed by an 8% rebound in the spring, which peaked again in June. The Bank of Canada attributes this atypical trend to the ongoing lack of housing availability. In response, the Canada Mortgage and Housing Corp. is advocating for the addition of approximately 3.5 million housing units by 2030 to improve affordability.

Carolyn Rogers, senior deputy governor at the Bank of Canada, pointed out the surprising resilience of the housing market in comparison to historical norms. Rachel Battaglia from RBC noted that limited housing supply has kept prices relatively stable, despite the surging costs of homeownership caused by rising interest rates. She highlighted that while Ontario and British Columbia have experienced more pronounced difficulties, Alberta’s market, particularly Calgary, continues to thrive, thanks to low debt-to-household income levels and a robust commodity-driven economy.

A report from Royal LePage has raised concerns about homeowner anxiety regarding upcoming mortgage renewals at higher rates. Fixed mortgage rates linked to bond yields remain elevated, with TD Bank economist Rishi Sondhi predicting a 5% decrease in average home prices and a 10% drop in sales activity by the first quarter of 2024. RBC forecasts that unemployment could rise to 6.5% within a year, potentially impacting the housing market.

On a more positive note, record levels of immigration are anticipated to spur employment growth. The mortgage stress test serves as a safeguard against potential increases in borrowing costs. Meanwhile, the delinquency rates for auto loans have surpassed pre-pandemic levels, signaling potential economic hurdles. The Bank of Canada’s forthcoming financial system review will offer insights into households’ circumstances amid higher rates, with Governor Tiff Macklem acknowledging a “narrower” path to economic stability.

Battaglia and other economists expect home prices to keep declining as higher interest rates continue to exert pressure on homeowners. This aligns with reports from the Bank of Canada indicating that home price reductions have been less severe than anticipated, attributed to ongoing structural supply issues despite the rate hikes.