Canada: A Hot Housing Market for Valentine’s Day

Canadian homebuyers certainly didn’t spurn the housing market according to data released on Cupid’s Day. This was suggested by numbers published earlier for Toronto External link., Vancouver External link., Calgary External link. and Edmonton External link., but increases were particularly strong in Ontario and BC. Broad-based sales gains in January left national level home purchases almost level with the June 2023 high that followed the Bank of Canada’s (BoC) decision to pause its hiking campaign early last year. Homebuyers may be responding to the reduction in bond rates seen earlier this year, which primarily reflected market bets that central bank policy rate cuts could come down in the months ahead. Sales price growth was more modest but generally tightening supply-demand balances across multiple major markets (graph 1) suggest stronger gains could be coming.

But we still think it’s too soon to assume that a return to frothy market conditions is imminent across the country. For one thing, North American bond yields have ticked somewhat higher since January in response to stronger-than-anticipated economic data that some investors think will delay monetary easing. Moreover, January sales figures tend to be subject to abnormally large seasonal adjustments External link.. That said, January 2024 increases were strong enough to bring sales back to within pre-pandemic seasonal norms (graph 2). Finally, despite better-than-expected January results External link., we still don’t think Canada’s labour market has felt the full effects of rate hikes already completed. Those could weaken housing demand in the coming months.

We didn’t get much clarity on where listings—which have been volatile of late—are going, but these will be very important to watch going forward. Weak listings put upward pressure on prices during the last sales rebound. New properties for sale then rose dramatically following the second round of interest rate hikes, implying many individuals who bought homes in a lower-rate environment were struggling with sharply higher borrowing costs. But the sharp fall in listings that began in September suggests many homeowners have some flexibility to wait for more favourable selling conditions. In January, listings rose at the national level, and some local real estate boards also indicated that listings increases last month enabled higher sales, consistent with the strong homebuying intentions reported by the last BoC consumer survey External link.. Against this backdrop, Canada is still grappling with a significant long-run housing supply shortfall External link., and inventories remain tight versus history in most regions despite the gains experienced last year (graph 3).

Overall, strong results last month don’t change our view that the first BoC rate cut will come in the second quarter of this year. For now, we think the central bank will put more weight on slowing economic activity, easing price pressures and falling job vacancies. But there’s still no question that the BoC will be monitoring the housing market, especially given how much we expect shelter price inflation External link. will impact the rate of annual consumer price growth.