Towards another hike, on Wednesday, of the Bank of Canada’s key rate? If real estate serves as a barometer of reference for sectors sensitive to the cost of money, the rather exceptional monetary austerity would have started to have a marked effect in the third quarter. This did not prevent the central bank from going ahead with another 100 basis points in two hikes in October and December. In short, a break in January would be welcome.
The vast majority of economists are forecasting an additional 25 basis point hike on Wednesday, which would bring the target for the overnight rate to 4.5%. But there are those who speak instead of a pause that would allow the central bank to better measure the lag effect of its monetary tightening. National Bank economists are part of this camp, which has few followers. They see growing signs of pressure on households, declining consumer and business confidence, and measurable easing of rising prices, despite continued strength in the labor market and past high inflation. from the goods sector to the service sector.
Last year, the Bank of Canada failed to match forecasters’ expectations five out of eight times, they write. To then recall that the effect of an additional rate hike is not linear.
Real estate inflection point
Data released on Monday by JLR, an Equifax company, points to an inflection point in a rather gloomy 2022 report on the residential real estate market. He observes that housing market activity in Quebec has declined for six consecutive months, one of the longest periods of declining sales on record. “And it’s not over yet. The magnitude and speed of rising interest rates began to materialize in the third quarter, and buyers’ ability to qualify for mortgage financing declined sharply. »
Note that, from March to the end of the third quarter, the central bank raised its key rate by 300 basis points. Two increases of 50 points each followed in October and December.
According to the deeds of sale published in the Quebec Land Register and compiled by JLR, sales of single-family homes decreased by 29% in the fourth quarter compared to the corresponding quarter of 2021. The decline is 39% for condominiums and 47% for multiple dwellings. “Overall the fourth quarter results more tangibly reflect the impact of interest rates on sales,” the firm said. On the insolvency front, notices of exercise were up 18% between the fourth quarters of 2021 and 2022. In fact, the number of bad debts in residential real estate has been steadily increasing since the second quarter.
The Bank of Canada has already indicated that households who renew their loans face an increase greater than those observed in the monetary tightening cycles of the last thirty years.
For 2022 as a whole, sales of single-family homes and buildings with two to five units were down 24% and 28% respectively, while those of condominiums were down 23% compared to 2021. but following an exceptionally high level of activity during the pandemic. This historic decline should also be put in the context of a rapid and high rise in the Bank of Canada’s key rate, with seven increases for a total of 400 basis points in 2022. And JLR added: “this acceleration of the downward trend must be put into perspective, as the results for 2022 remain above the average of the last decade. In fact, for all categories of buildings, the market is still favorable to sellers”.
Thus, on the supply side, new listings ended the year up 1%. JLR talks about a rather unusual situation in such a bear market and sees it as a propensity for sellers to wait before lowering their price or temporarily removing their property from the market.
Price correction
The price impact also masks a breakout. The Teranet-National Bank house price index posted an increase of 2.5% in Montreal, 4.7% in Quebec and Ottawa-Gatineau in December, over one year. But since the peak, the index is down 13.9% in Ottawa-Gatineau and 9% in Montreal since June, as well as 4.5% in Quebec since July. At the Canadian level, the cumulative decline since the peak reached in May 2022 totaled 10%, the largest contraction in the index on record.
Looking ahead, overall, higher interest rates and home ownership challenges could continue to be significant constraints for buyers throughout 2023 and beyond. “This situation should keep activity in slow motion and limit any price increases,” believes JLR.
However, it is expected that demographic dynamics will reverse the trend, particularly under the impetus of strong immigration. We see it for rental. By way of illustration, according to Rentals.ca, the monthly rent for a two-bedroom unit jumped, on average, by 5.3% in Montreal last year to reach $2,073. It jumped 9.4% in Quebec, to $1,463, and 16.4% in Laval, to $1,959.