Canadian Housing Market: Anxiety Over Falling Home Sales and Upcoming BoC Rate Cuts

However, in the CREA video Fledgling Canadian Housing Market Momentum Hits Pause in July, Senior Economist Shaun Cathcart expressed optimism about future rate cuts, stating “Our forecast for rekindling Canadian housing activity heading into 2025 has basically gone from a layup to a slam dunk.” With expectations that the Canadian housing market will grow hot next year, Cathcart also voiced concerns: “The concern really now becomes whether demand comes back too fast, and we get an upswing in prices.” In contrast, an August 7th Global News article suggests the BoC is now less concerned that reducing interest rates will lead to an increase in home prices.

Speculation around further cut rates was fueled by August 19th reports from Yahoo! Finance and the Financial Post, which suggested that rate cuts hinged on positive Consumer Price Index (CPI) inflation data for July. According to an August 20th CBC News article, Canada’s inflation rate dropped to 2.5%, marking the lowest level since March 2021, leaving the door open for potential rate cuts in September, as noted by the Financial Post and Bloomberg on August 20th.

The CREA report indicated that the benchmark price rose marginally by 0.2% to $718,700 in July (download data spreadsheet from the National Residential Statistics section), up from June’s $717,600, but down approximately $30,000 compared to the same time last year. This relative price flatline comes amid a continued slowdown in sales. An August 6th Globe and Mail article highlighted a sales drop in major cities such as Toronto, where “buyers remain unmotivated.”

The CREA data spreadsheet shows that sales fell 0.7% to 38,626 in July, well below the 10-year average of 40,718 (excluding 2020, 2021, and 2022 due to pandemic-related anomalies). While July’s sales numbers are about 2,000 below the 10-year average, they are not as alarming as initially suggested.

However, CREA’s use of the 10-year average slightly distorted month-over-month (MoM) comparisons. For instance, the months of inventory (MOI)—a measure of how long it would take to sell all homes if sales ceased—remained at 4.2 months in July, unchanged from the previous month. Cathcart noted in the video, “listings were up just a bit in July, but ultimately, it wasn’t enough to move the needle on the number of months of inventory . . . The long-term average for the number of MOI in Canada is five months.”

However, according to CREA data, the long-term average MOI is actually 3.6 months (including the skewed COVID years), making July’s MOI numbers higher than typical. Further analysis of every July MOI figure reveals an average of 2.9 months’ worth of inventory.

Therefore, sales were lower than normal for July (even excluding the COVID years), and the MOI was higher than expected. However, Cathcart remains optimistic, citing the upcoming BoC rate cuts, which “are actually expected at every remaining meeting this year.” 

According to the BoC policy interest rate schedule, further 2024 interest rate announcements are set for September 4th, October 23rd, and December 11th, with 2025 first-quarter announcements slated for January 29th, March 12th, and April 16th. CREA expects 2.5 more rate cuts, bringing the policy rate down to 3%. 

Are these expectations reasonable? The August 2nd BoC market participants survey shows that most expect the rate to be between 3.25% and 3.5% by this time next year. With these cuts, Cathcart believes that “you combine that with a record amount of demand waiting in the wings to come back into this market,” leading to the aforementioned “slam dunk,” with the risk of higher home prices.

Furthermore, the BoC survey indicates uncertainty in the housing market, with 68% of respondents predicting a stronger market next year, while 60% foresee potential weakness. Rate cuts are intended to stimulate a weakening economy, and 38.8% of respondents think that there is a chance of a recession over the next year.

A recession isn’t out of the realm of possibility, as there are growing signs of a weakening Canadian economy. According to an August 11th Globe and Mail article, real estate bankruptcies in Canada are on track to exceed the levels experienced during the global financial crisis. The July 24th BoC summary of governing council deliberations noted that concerns had diminished that latent demand would cause a rapid increase in housing prices following reductions in the policy interest rate.

To maintain their 2025 housing market predictions, CREA is depending on persistent BoC rate cuts, which will largely depend on Canada’s CPI inflation data, set for release on September 17th. How has the August 20th CPI report affected the BoC’s decision-making and the state of the Canadian real estate market thus far?

As mentioned in the August 20th Statistics Canada CPI report, inflation in July increased at “the slowest pace since March 2021.” According to an August 20th Reuters article, “Canada’s inflation [cooled] to [a] 40-month low of 2.5% in July.” The CPI report shows that mortgage costs, rent, food from restaurants, auto insurance, and property taxes were the largest contributors to Canada’s CPI inflation deceleration. Encouragingly, measures of core inflation (see table 4), which deeply affect BoC interest rate decisions, also fell, with CPI medium dropping from 2.6% to 2.4% and CPI trim decreasing from 2.8% to 2.7%.

This is a positive sign. With inflation heading downward, falling to “a three-year low,” according to an August 20th Bloomberg article, and the reversal of upward inflation trends “cementing September rate cut bets,” according to another August 20th Bloomberg article, the BoC seems poised for a likely rate cut in September.

That being said, how far will the BoC need to cut rates? How low must rates go given the reports of Canada’s weakening economy, as highlighted in an August 5th Canadian Mortgage Trends report and an August 15th Financial Post article?

According to the aforementioned BoC Market Participant Survey, the policy rate could be 3% by Q3 2025. However, in a Bloomberg interview, Rosenberg Research Founder and President David Rosenberg suggested that the BoC may have to act more quickly to avoid 0% inflation. “Their concern is that inflation will fall below 2%, their target,” said Rosenberg. “They do nothing, inflation is going to zero in the next 12 to 24 months.” In the video, Devlin Capital Founder Ed Devlin summed up Rosenberg’s concern, explaining that disinflation or deflation is particularly harmful because of the high levels of debt held by both the government and consumers. With inflation at zero or below, the real cost of repaying debt increases, making it more expensive when adjusted for inflation.

Deflation would make servicing existing debts even more expensive, as decreasing prices lead to downward pressure on wages and productivity. According to an August 13th BoC Understanding Inflation report, a continuous drop in price levels, known as deflation, can negatively affect the economy. It reduces consumer and business demand, which in turn drives prices down even further, creating a cycle of declining prices.

If prices were to fall, it could reduce production incentives, as investing in production would be less attractive if goods prices are expected to decrease. This could, in turn, lower wages, making debts more expensive to service for both the Canadian government and households.

With the BoC poised to cut rates to stimulate the economy, Canada’s real estate market continues to slow, with benchmark prices up slightly and sales weakening. Will 2025 fulfill its promise as a banner year for the Canadian real estate market?

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.