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

Single-family house (romakoma/Shutterstock)

The two most recent consecutive hikes in the policy interest rate by the Bank of Canada were not anticipated by most economists and other analysts.

The rate was increased by 0.25% to 4.75% on June 7 and a further 0.25% to 5% on July 12, following the decision to hold the rate at 4.5% for much of the year to date. In its rationale, the Bank of Canada indicated the increases were needed due to excess activity in the economy, which further exacerbated inflation.

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As can be expected, the Canadian Real Estate Association (CREA) believes the consecutive hikes will have the effect of curbing home sales volumes. It has now downgraded its forecast for home sales in 2023 and 2024 compared to its April 2023 outlook, along with its trajectory for prices. Activity is now expected to stabilize or rise at a slower pace than recent months.

Earlier this year, most analysts believed the cycle of policy interest rate hikes had come to an end, and that the Bank would continue to hold the rate at 4.5% through at least late 2023. It was previously expected that the rate would start to decrease possibly in early 2024.

With the latest hikes, according to the CREA, there is now a growing consensus that rates will not just be higher, but likely for longer — well into 2024.

In real numbers, the CREA is now forecasting a total of 464,000 home sales across the country in 2023, representing a 6.8% year-over-year drop. As well, the national average home price will drop slightly by 0.2% year-over-year to $702,409, which is up from the previous forecast due to gains in Metro Vancouver and Greater Toronto, and stronger than expected price growth overall nation-wide.

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

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

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