Canadian Real Estate Prices Rip Higher, Rates May Not Be High Enough: BMO

Canadian Real Estate Prices Rip Higher, Rates May Not Be High Enough: BMO

Canadian real estate prices are back to climbing aggressively just over a year after the correction began. Canadian Real Estate Association (CREA) data shows the price of a composite benchmark, or typical, home surged in April 2023. The unusually large increase observed also happens to be similar in size to increased leverage from falling mortgage rates. This begged one of the country’s largest banks to ponder, is monetary policy still too loose? 

Canadian Home Prices Climbed $17k In A Month

Canadian residential real estate prices are back to surging higher. The composite benchmark climbed 2.3% (+$16,900) to $744,600 in April. The month marks the third consecutive increase, with only a handful of markets seeing a pullback. 

It’s likely hard for most to appreciate the size of these numbers. For context, home prices across the country climbed more than a quarter of the median gross annual income of a Canadian, in just one month. If this persisted at this rate, home prices would double within 3 years and a mortgage for a typical home across the country would only be attainable by fewer than 1% of the population. 

Growth at a rate this high is unlikely to persist for long, but it feels important to highlight the current market’s exuberance only a year after prices began to pullback. 

Canadian Real Estate Prices

The price of a typical home across Canada, in Canadian dollars. 

Source: CREA; Better Dwelling.

Canadian Real Estate Prices Are Still Significantly Below All-Time Highs

Just three consecutive months of growth doesn’t establish a new trend (yet), but annual growth is improving. The national benchmark is still down 12.3% (-$104,500) from the same month last year, but off the biggest annual drop on record. 

Canadian Real Estate Price Growth

The 12-month change in Canada’s benchmark home price.

Source: CREA; Better Dwelling.

A Perfect Storm of Rising Sales, Falling Inventory, and Rising Mortgage Leverage

Home sales remain historically weak, but improved from last year’s lows. At the same time, new listings of homes for sale  have pulled back, leaving the sales to new listings ratio (SNLR) at just 70% in April. That’s a very tight market, where home prices are expected to climb.

“The snapback in sales, the firming in prices, and the bounce in starts in April all suggest that the housing market has found a floor,” said Douglas Porter, a senior economist with BMO. 

He doesn’t think markets improving after the Bank of Canada “pause” announcement is a coincidence, adding, “Some clarity on the interest rate front has no doubt played a major role, as has the underlying resiliency of the economy itself (highlighted by the persistent strength in jobs).” 

A Big Six Bank Is Pondering If Monetary Policy Is Still Too Loose

Even with tight demand, home prices climbed at an usually fast rate last month. Earlier this month, we reported that home prices also climbed in Toronto (+2.4%) and Vancouver (+2.4%) at an unusually fast, but similar rate. It turns out the increase is just under the sharp mortgage leverage increase observed in fixed rates, adding roughly 2.6% leverage in April. 

It’s not a coincidence. As stated, a BoC study revealed that over a 30-year period, Canadians adjust their budget to pay a similar amount as rates fall. Falling interest rates didn’t provide relief, but the increased leverage is being added to the price of a home. 

When combined with tight inventory and state-limited risk, it’s easy to see why Canadians have done this. Most people are just seeing massive wealth increases, and state-assisted relief when risk appears. 

BMO made a similar credit-related observation this morning. “As we have often pointed out, if housing—the most interest-sensitive and cyclical sector of the economy—is showing a renewed pulse, it begs the question of whether monetary policy is nearly tight enough,” said Porter. 

“While we don’t look for further rate hikes by the Bank of Canada, renewed strength in housing certainly aims the risks squarely in that direction.”