Bank of Canada hold keeps real estate industry waiting

Resurgence in the housing market could bring back interest rate hikes

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The Bank of Canada’s decision to keep its key overnight interest rate steady at five per cent for the fourth time was widely expected by the real estate sector, but whether it will be enough to bring buyers back to the market remains up for debate.

“(The) decision to hold rates is certainly a welcomed one for many Canadian homebuyers,” ReMax Canada president Christopher Alexander said in response to the central bank’s Jan. 24 announcement.

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Alexander, who pointed to the rush into the market in the early days of the pandemic, said he is hopeful the hold will be enough to induce more activity, “especially for those that have been taking a ‘wait and see’ approach and are waiting for the right time to re-enter the market.”

Mortgage strategist Robert McLister, however, pointed to a different recent historical precedent.

“Last January we saw CREA’s average home price rocket 19 per cent in just five months following the bank’s first rate pause. That’s an extraordinary move,” McLister said. “Will we see the same this spring? It’s not the expectation but if mortgage rates slide into the mid-to-low-four-per-cent range, I sure as heck wouldn’t bet against it.”

James Laird, co-CEO of and president of CanWise mortgage lender, said if the central bank had revealed specifics about a cut that would have jump-started the housing market.

“Any indication of rate cuts from the Bank of Canada would have put upward pressure on home prices immediately,” he said.

Without them, there could be a shift in the opposite direction, given that lenders had been holding off raising mortgage rates after the recent rise in bond yields.

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“Lenders will consider moving fixed rates higher since there is no new information from the bank,” Laird said.

One factor working against a prolonged surge in home prices could be the Bank of Canada itself: Central bank governor Tiff Macklem said a jump in home prices could induce the bank to renew its interest rates hikes.

According to the Canadian Real Estate Association (CREA), home prices are forecast to rise in 2024 and 2025, after the MLS Home Price Index (HPI) ended 2023 up 0.7 per cent in December. The average price was also up 5.1 per cent over the previous December to $657,145.

Should there be a resurgence in the real estate market, McLister said rate relief would likely be more gradual.

“If housing activity sizzles more than expected, mortgage rates could remain at a higher altitude, for longer. That doesn’t mean prime rate will hold at 7.20 per cent, but it would imply less rate relief ahead,” he said. “The pace of cuts could be slower and the trough in rates could be higher.”

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According to McLister, if housing demand continues to contribute to inflation, the Bank of Canada will face a difficult decision. It may have to choose between tolerating higher home prices or risking negative effects on the broader economy by maintaining high-interest rates.

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