Canadian Housing Market: Rate Cuts Lackluster, BoC Focus on Safeguarding Financial Reserves

Vancouver, BC | Stephen H

Written by Breck Hapner

According to a July 14th Financial Post report, the Bank of Canada’s (BoC) June 5th 0.25% interest rate cut did not significantly improve affordability or increase real estate sales, as most Canadians remain skeptical about its impact. The article’s analysis of a poll by market research firm Abacus Data indicated that the majority of respondents did not expect the rate cut to make housing more affordable or lead to a surge in market activity. 

Responding to pressing economic and financial concerns and the lackluster results following the June 5th cut, the BoC determined further steps were necessary. On July 24th, the BoC further lowered its key interest rate by another 25 basis points to 4.5%, according to a July 24th report from the Financial Post.

CREA Releases Enthusiastic June Housing Report

The Abacus Data poll followed the July 12th release of the Canadian Real Estate Association (CREA) Monthly Housing Report, which indicated signs of recovery in Canada’s housing market after the BoC’s June rate cut. In CREA’s June video report, Senior Economist and Director of Housing Data and Market Analysis Shaun Cathcart said, “We do think that the worst is in the rearview mirror at this point.”

The Globe and Mail reported on July 10th that sellers have placed properties on the market in July “to get a jump on the fall market.” What insight can we glean about future buyer intentions in light of the recent survey?

Saanich, BC | Mike Benna

Poll Reveals Canadian Real Estate Market Uncertainty

According to the Abacus Data poll, most Canadians don’t think the BoC rate cuts will have a major impact on the real estate market, with 73% stating that housing affordability won’t change or lead to a major surge in sales. Only 6% of respondents anticipate a significant increase in market activity, while 29% believe there will be a slight increase.

A February 2nd Financial Post article noted that lower mortgage rates in the past led to a rush of buyers eager to purchase before prices climbed again. However, the Abacus poll shows that only 10% of buyers plan to accelerate their home purchase timeline, and only 11% of sellers plan to list their homes based on the recent BoC rate cut. 

Key Housing Indicators Move Into Positive Territory

Despite Canadians’ tepid response to the BoC’s June rate cut, a July 12th Yahoo Finance article reported that CREA noted a 3.7% rise in home sales from May to June, with the benchmark home price increasing to $696,179, a 0.1% month-over-month gain. BMO senior economist Robert Kavcic said, “All told, the resale housing market was subdued across much of the country in June, with little major response to the initial rate cut of this cycle.”

CREA data from May to June showed that sales outpaced new listings, tightening inventory nationally from 4.3 to 4.2 months. The sales-to-new-listing ratio rose from 52.8 to 53.9, indicating a market favoring sellers.

“I would describe it as a small but noticeable change in direction from what we’ve been seeing up until now this year,” said Cathcart. “On the demand side, housing data has been pretty flat this year; sales and prices not really up, not really down.”

BoC Press Release Focuses on Economy and Inflationary Pressures

Following the BoC’s second 25-basis-point rate cut, lowering the policy rate to 4.5%, a July 24th press release noted that Canada’s inflation rate had dropped to 2.7% with broad inflationary pressures easing. The BoC noted that they expect inflation to continue declining, potentially leading to more rate cuts. They emphasized that the slowing economy allows for further rate cuts without exacerbating inflation.

However, the BoC expressed concern over potential inflation risks, including persistent inflation in shelter and other services, as well as geopolitical tensions.

Peggy’s Cove, NS

BoC Press Conference Addresses Key Questions

In a press conference on July 24th, BoC Governor Tiff Macklem and Deputy Governor Carolyn Rogers discussed future interest rate directions. Macklem emphasized the importance of managing upside inflationary risks in the decision-making process while reiterating the need to reduce inflation and jump-start the economy.

“We don’t need more excess supply; we need growth to start picking up,” said Macklem. “We need job creation to start picking up to absorb the excess supply in the economy and get inflation sustainably back to target.”

The press conference also addressed the BoC’s overnight repo operations, which are increasing up to $16 billion, despite $105 billion in their reserves (Scroll to Canadian dollar deposits, Members of Payments Canada). 

According to a July 17th Bloomberg article, the Canadian Imperial Bank of Commerce (CIBC) says the BoC must end or fix their quantitative tightening, including overnight repo operations, which are causing distortions in short-term markets and inflating effective rates. 

In the video, Rogers states there has been pressure on overnight rates due to cash futures basis trade, although Canada has moved to a T+1 settlement on securities, increasing the demand for overnight money. “There’s still what we think to be enough settlement balances in the system, but they’re not necessarily in the spots they need to be on any given overnight cycle,” said Rogers.

As highlighted in the aforementioned Bloomberg article, Macklem expressed concerns about the basis trade. However, as early as February, CIBC had already raised issues about the January cash injections, despite the BoC having $115 billion on reserve. The key question now is, “Where should the balances be, and what actions does the BoC plan to take to address this?”

The Fallout or Saving Grace?

The BoC’s reaction to perceived increases in leverage and “stretched” asset valuations could threaten financial stability, which could negatively impact the housing market. The BoC is focused on the steep rise in leverage within Canadian bond and repo markets by hedge funds, which is linked to the timing and amount of interest rate cuts. Major price fluctuations could disrupt the economy and impact real estate valuations in the housing market.

It appears that the BoC may implement another rate cut in the future while continuing overnight repo operations to build a larger cash reserve. The BoC seems to have shifted its concern from inflationary pressures to the overall health of the economy, anticipating that a weakening economy will exert downward pressure on prices.

While CREA’s July 12th monthly housing report highlights an uptick in activity for June, the Canadian housing market remains sluggish. The Abacus Data poll noted that Canadians harbor a guarded approach to housing market dynamics with doubts about improvements in affordability, stating that they are “likely to proceed carefully, closely watching for future developments before committing to major decisions related to buying, selling, or mortgage renewals.”

In our next article, HAVEN will take a further look at the numbers: how Canada’s housing market is reacting to prevailing economic factors influencing real estate.