Effect of Latest Interest Rate Hike: Housing market activity will soften, but home prices are not likely to go down

Canadians continue to grapple with the increased cost of living. The Bank
of Canada’s latest hike to interest rates on July 12 will add more pressure to
variable rate mortgage holders. It will also make it more difficult for those
looking to qualify for lending.

Buyers who have secured a rate hold are anxious to make a purchase
before it expires.

Some sellers have hit the pause button on listing their
homes until economic conditions stabilize. This will further contribute to a
lack of available inventory. Additional demand pressures will ensure that
home prices remain stable through an expected decline in sales activity in
the coming months.

“The Canadian real estate market has been in a steady state of recovery
since the start of the year. While these additional interest rate hikes, and
those potentially to come, will likely put a damper on activity and sales
volumes, demand for housing remains very strong,” said Phil Soper,
president and CEO of Royal LePage. ”We expect the rate of appreciation to
moderate through the second half of 2023, causing home prices to level
off or increase marginally.”

What do the experts say?

Royal LePage is forecasting that the aggregate price of a home in Canada
will increase 8.5% in the fourth quarter of 2023, compared to the same
quarter last year. The previous forecast has been revised upward to reflect
strong activity and price appreciation in the first half of the year.

According to the Royal LePage House Price Survey released in mid July,
the aggregate price of a home in Canada decreased modestly by 0.7%
year-over-year to $809,200 in the second quarter of 2023. The indication
here is that nationally, the real estate market is close to the point where it
will have recovered fully from 2022’s post-pandemic market correction.

Aggregate price of a home in Canada rose 4.0% in Q2

On a quarter-over-quarter basis, the aggregate price of a home in Canada
rose 4.0% in Q2. This was the second consecutive quarter to show
positive growth. As a result of the Bank of Canada’s aggressive interest
rate hike campaign, there has been a decline in prices over the last year.
Interest rates began rising in March of 2022.

“The Bank of Canada’s prolonged series of interest rate hikes has changed
where and how people live. It has pushed some buyer hopefuls to choose
less expensive housing types or neighbourhoods. Others have chosen to
relocate to more affordable markets across their province or across the
country.

And, some buyers have been pushed to the sidelines indefinitely,”
Soper continued. “Economic uncertainty has caused some potential
sellers to reevaluate their plans as well. The worry that they will be unable
to find the move-up home they need in today’s tight market is a major concern.

Further, there are those who secured fixed-rate mortgages at
generational lows of two percent or even less, who are understandably
reluctant to wade back into a market with substantially higher borrowing
costs. Fewer sellers mean fewer listings, which adds further pressure to
our chronic shortage of inventory. Access to affordable housing in Canada
will continue to be a major social issue.”

Second quarter press release highlights:

● Aggregate price of a home in Canada in Q2 2023 sits at just 5.6%
below the peak reached in Q1 of last year
● 94% of regions in the report posted quarterly aggregate home price
appreciation
● Chronic shortage of housing supply, due in part to sellers’ hesitancy
to list, continues to put upward pressure on home prices
● Royal LePage urges officials to quickly increase support for more
development, including affordable, purpose-built rental buildings