Canada’s housing market has roared back to life this spring, displaying a vigor that has surprised observers and potentially caused concern for the Bank of Canada.
According to the Canadian Real Estate Association’s data released on June 15, home sales in May increased by 5.1% compared to April, marking the fourth consecutive monthly rise. This propelled overall activity to a level 1.4% higher than the previous year, representing the first national year-over-year sales increase in nearly two years.
RBC’s assistant chief economist, Robert Hogue, noted that May’s gains followed an impressive 11.3% spike in April, which significantly narrowed the gap with pre-pandemic levels. In fact, home sales are now only 6% below the figures recorded in February 2020.
“The recovery to date is stronger than we expected,” remarked Hogue in a note, highlighting the substantial sales growth across all provinces. British Columbia led the way with a 23% surge in sales, closely followed by Ontario with a notable 22% rise. The real estate hotspots of Vancouver and Toronto witnessed astonishing increases of 35% and 32%, respectively.
Not only did sales see a surge, but housing prices also rose for the second consecutive month. The national composite MLS Home Price Index, which previously experienced a 15% decline from its peak in February 2022, has rebounded with a 4.1% increase in the past two months. May’s 2.1% rise aligns with the average monthly rate observed during the market boom.
Certain cities within Ontario witnessed sharp price increases. Cambridge saw prices rise by 4.9% month over month, followed by Northumberland Hills (4.7%), Sudbury (4.5%), Kitchener-Waterloo (3.6%), Kawartha Lakes (3.2%), and the Greater Toronto Area (3.1%).
In British Columbia, the Fraser Valley led the gains with a 2.4% rise, while Winnipeg in the Prairies experienced a 0.9% increase. Halifax in the eastern provinces also witnessed growth, with prices up by 1.8%.
The sudden turnaround in the housing market can largely be attributed to the impact of interest rates. The pause in the Bank of Canada’s rate-hike campaign in March played a crucial role in reinvigorating demand. However, the recent unexpected rate hike of 25 basis points to 4.75% by the central bank is likely to have consequences for the ongoing real estate recovery.
BMO senior economist Robert Kavcic highlighted the potential effects of the rate hike, stating, “It stands to reason that the Bank’s latest 25 bp rate hike will again dampen market psychology somewhat and take some steam out of recent activity.”
Furthermore, the increase in commercial banks’ prime rate to a 22-year high of 6.95% and the upward trend in bond yields, which affect fixed-mortgage rates, are expected to impact the housing market.
While the current strength in the market may not be sustained for the remainder of the year, RBC anticipates a more gradual recovery of prices and sales until the Bank of Canada initiates rate cuts in 2024. However, given the market’s surprising performance to date, RBC acknowledges the potential for continued surprises in the future.
In the realm of equities, the S&P 500 has recently entered bull market territory with a 20% rise from its October low. However, Stéfane Marion of National Bank of Canada cautions that the underlying details of this performance are “far from stellar.”
Marion points out that the 88 companies in the IT and communications sectors, accounting for over a third of the S&P 500’s market capitalization, are driving the growth. Much of this growth is tied to the increasing interest in artificial intelligence.
Despite the rally in equities, Marion remains cautious, citing uninspiring economic data, a more hawkish Federal Reserve, and the S&P 500’s recent overbought territory. Consequently, Marion recommends an underweight position in equities relative to the benchmark.
Featured Image: Freepik
Author Kristen Moran 
