Canadian Housing Market, February Recap

The Financial Post reinforced the findings from Royal LePage, noting that among the 56% of Canadian adults who have postponed their home searches, half are simply waiting for rate drops; 10% said that a 25-basis-point rate cut would prompt them to re-enter the housing market, with another 18% willing to participate once rates decrease by 50 to 100 basis points (bps).

So, if half of the Canadian population has put off buying a home due to rising rates, and 28% of that group plans to re-engage once rates drop by 25 to 100 bps—which, according to a February 28th, 2024, Financial Post article, could happen at any time—then this could lead to a significant surge in demand when the BOC eventually cuts rates.

However, the headline and the actual survey data do not precisely align. In fact, the article doesn’t even match the data. The actual Royal LePage survey results indicate that 71% of Canadians had no intentions of purchasing a home, with only 15% postponing their plans. So, where did the Financial Post get that attention-grabbing 56% figure?

Well, the Financial Post sourced this data from the Royal LePage survey, which found that among the 27% of Canadians active in the housing market over the past two years, 56% had to delay their property search. So, instead of 56% of Canadians postponing home purchases, it’s actually 56% of 27%, equating to 15.2%. 

This realization changes other statistics as well. For example, the 10% planning to re-enter the market after a BOC rate cut represents 10% of 15%, or 1.5 individuals out of 100.

Royal LePage’s headline does not mention this breakdown of the survey results, simply noting that half of sidelined buyers are waiting for interest rate cuts to resume their purchase plans. While buyers may indeed return to the market following rate reductions, it’s crucial to question why the data is misrepresented to depict a worse scenario than actually exists. Are there underlying concerns driving this narrative?

The BOC announced on March 6th, 2024, that it would maintain interest rates at 5%, stating that “it’s still too early” to ease monetary policy, a decision widely expected by those outside the real estate industry.

BOC Governor Tiff Macklem, along with Deputy Governor Carolyn Rogers, addressed persistent inquiries regarding rate cuts during a subsequent press conference, along with discussions on the Canadian repo market, housing market, quantitative tightening, and government debt, with a looming $7B increase in the federal deficit.

The implications of the BOCs decision to maintain interest rates were outlined in an official statement, noting some progress in inflationary measures but expressing concerns about the persistence of underlying inflationary trends. 

While these measures of core inflation have shown some downward trajectories, they rose in December, a point of concern for the central bank. Signs of reignition in other sectors of the economy, including the housing market, as acknowledged by Macklem during the March 6th press conference, amplify this concern.

When asked about the timing of potential interest rate cuts, Macklem emphasized that the BOC would not offer forward guidance, stating, “. . . I can’t really predict what we’re going to say . . .” 

A Bloomberg reporter inquired, “If you do eventually make a decision to loosen monetary policy, how might you think about the frequency of rate cuts or the pace of rate cuts? In other words, is there a scenario where we see a period of both rate cuts and pauses, especially given the challenge with persistent inflation?” to which Macklem replied, “I think it’s very safe to say we’re not going to be lowering rates at the pace we raised them.”

During the press event, Mark Randell of The Globe and Mail asked Macklem about repo operations, and whether the lack of liquidity indicates that the bank may be ending quantitative tightening and resuming the purchase of government bonds. After briefly explaining how the repo market works, Macklem stated that the BOC hasn’t conducted any repos since January and clarified that the overnight repo operations were not a sign that the BOC would be ending quantitative tightening.

Macklem then deferred to Rogers to explain why the BOC had to enter into the market in the first place, to which she said, “Later in January, markets settled into the view that central banks were likely to cut rates soon, pushing the demand for long bonds up. Many participants were purchasing those long bonds on leverage, so the demand for funding was up sharply.” 

Investors had borrowed cash from banks to invest in long-term bonds, anticipating forthcoming interest rate reductions. This surge in demand for funds depleted bank reserves, causing the price of liquidity to rise, forcing the BOC to intervene in the repo market. Despite this intervention, it’s noteworthy that the BOC had to step in for the first time since March 2020. However, it’s not the first time that markets anticipated interest rate cuts. 

Why was liquidity so low this time? During the March 6th press conference, Macklem was questioned about the potential ramifications on BOC policy if there were substantial increases in Canadian housing market activity and government debt. Specifically, if there were a massive expansion of government debt and housing market prices rose alongside it, how would the BOC respond?

Macklem acknowledged that both factors could impact inflation. “If everything else in our projection was the same, and housing was stronger and government spending was stronger, that growth would probably be stronger and there’d probably be less downward pressure on inflation,” said Macklem. “That is something we would have to take into account when we consider our interest rate setting.” 

Macklem’s response implies that the BOC is keeping an eye on house price inflation and its potential to put upward pressure on overall inflation if rates are lowered prematurely. The BOC closely monitors government debt, deficits, housing prices, and the Canadian housing market, adjusting rates as needed to keep inflation in check.

The ongoing discussion surrounding interest rates and their effects on homebuyers is particularly relevant as the real estate market navigates the aftermath of speculative tribulation. While media attention may sensationalize the situation, the BOC’s pragmatic approach offers a more grounded perspective. It will be interesting to see how the Canadian economy reacts to inflationary pressures and how the housing market evolves during the 2024 spring season.