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In April, there was a significant increase in Canadian home prices as the arrival of warmer weather attracted a large number of buyers to the market, resulting in intensified competition for a limited inventory of properties. The benchmark price for homes in Canada climbed to $723,900 (equivalent to approximately US$536,000), showing a 1.6 percent rise from March when adjusted for seasonal variations.
The number of transactions also experienced a notable surge of 11.3 percent compared to the previous month. However, data from the Canadian Real Estate Association indicates that the supply of new homes is at its lowest point in nearly two decades.
Following a significant decline in home prices last year due to a sudden increase in borrowing costs, the decision of the Bank of Canada to pause rate hikes appears to be playing a role in initiating a recovery. This pause has resulted in the stability of variable-rate mortgages’ costs, while longer-term mortgage rates have slightly decreased, influenced by a rally in government bonds.
Furthermore, Canada’s population is steadily growing, with over a million newcomers arriving last year. This influx has once again drawn attention to the shortage of available housing, prompting some buyers to make aggressive offers.
Shaun Cathcart, the senior economist of the real estate group, commented on the situation, stating that with interest rates at a peak and home prices at a low point, it was not surprising to witness buyers re-entering the market in April. However, the supply of housing has been slow, leading to price increases across the country from March to April.
For example, in countries like Sweden, experts anticipate that prices will continue to decline throughout the summer season. In contrast, the benchmark price in Canada still remains lower by a certain percentage compared to its level from a year ago.
Analysts suggest that while the rest of the economy may experience a slowdown due to higher borrowing costs, there are signs of recovery in Canada’s housing market following a year-long decline. This recovery could potentially lead to inflation and postpone the central bank’s plans to implement interest rate cuts.
Furthermore, analysts note that the impact of increased borrowing costs on homebuyers has been less severe than anticipated, resulting in a lower level of financial strain. As a result, the housing market has not experienced a surge in supply from sellers who are compelled to sell their properties.
The Bank of Canada is relying on slower economic growth to restore inflation to its desired 2% target. If the housing market rebounds, it has the potential to stimulate economic activity and directly contribute to upward pressure on prices
In Canada’s consumer price index, the cost of shelter holds the greatest weight, accounting for 30% of the index. Additionally, since home prices are highly noticeable and observed, any increase could strongly influence inflation expectations.
In the Greater Toronto Area, which is Canada’s most populous metropolitan region, the average home price continued to increase for the third consecutive month in April, along with a rise in sales. Similar positive trends have been observed in other major housing markets.
Despite the presence of higher borrowing costs, the delinquency rates for mortgages in Canada have remained low so far. Furthermore, borrowers with variable-rate mortgages have taken advantage of the option to temporarily extend the duration over which their debt is paid off. This has provided some relief from the impact of rising interest rates.
The absence of forced selling has played a significant role in the rapid stabilization of the market,” noted Kavcic. However, the situation may change as the Royal Bank of Canada has recently cautioned about the possibility of mortgage delinquencies increasing by over one-third in the next year. Another concern is the potential spill over effect from stress in the regional banking sector of the United States to Canada.
According to analysts, there are factors that could contribute to the recovery of the housing market. These factors include shortages in housing supply, high levels of immigration, and a strong labour market. Although wage growth may moderate in the upcoming months, which could potentially alleviate inflationary pressures, Stephen Brown, senior Canada economist at Capital Economics, mentioned that if house prices show significant upward momentum, the Bank of Canada is unlikely to be eager to quickly implement interest rate cuts.
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