The Bank of Canada is preparing for its interest rate decision amidst concerns that the spring housing market could overheat. The spring housing market, which typically begins in March, is currently showing a mixed picture across the country. Some western markets such as Alberta have seen a strong uptick in home sales, while Toronto has experienced a decline in housing activity for two consecutive months. Average home prices are slowly increasing in regions such as the Greater Toronto Area (GTA) after a market correction tied to the central bank’s rate tightening cycle in recent years.
Economists are expecting a modest uptick in home sales and prices this spring, largely driven by pent-up demand in Ontario and British Columbia. However, many potential homebuyers are still waiting on the sidelines for a clearer indication of lower borrowing costs from the Bank of Canada. The central bank has expressed concern about the potential for a hot housing market to stoke shelter price inflation, which could further delay the return of inflation to its two per cent target. The Bank of Canada is closely monitoring the housing market as it assesses its impact on inflation.
Recent economic data has been positive for the Bank of Canada’s inflation fight, with annual inflation cooling more than anticipated in two consecutive months. Despite this, the central bank is expected to hold its policy rate steady at 5.0 per cent in the upcoming decision, with potential rate cuts likely in June or July. Economists caution that an overheating housing market could lead to counterproductive outcomes, as the central bank seeks to avoid a reacceleration in price pressures. The market is currently in a “coiled spring” state, posing a risk of higher sales and prices than forecasted.
Buyers have responded positively to cheaper borrowing rates in the market during the Bank of Canada’s current tightening cycle, driving sales activity higher. However, uncertainties surrounding interest rates and a lack of clarity from the central bank are currently constraining buyers in the housing market. While some economists anticipate interest rate cuts beginning in July, others suggest that it may take some time for these cuts to significantly impact housing affordability. The housing market is expected to pick up in the second half of the year, but price appreciation may be limited in markets constrained by affordability.
Overall, experts believe that interest rate cuts could help improve affordability and bring more buyers into the housing market over the next few years. However, it may take several rate cuts over a period of time before a significant difference in affordability is seen. As the Bank of Canada continues to assess economic conditions and monitor the housing market, potential rate cuts and their impact on inflation and housing activity will be key factors to watch in the coming months.
