Canada's Housing Market shows Signs of Recovery

Canada's housing market has shown signs of recovery, with home sales increasing by 11.3% nationwide in April 2023, after a year of slump.

Canada's housing market has shown signs of recovery, with home sales increasing by 11.3% nationwide in April 2023, after a year of slump. However, this trend could have an impact on inflation, leading to a delayed cut in interest rates by the Bank of Canada (BoC).

Analysts predict that the recovery in the housing market is likely to push the benchmark interest rate, which has been at a 15-year high of 4.5% since January 2023, even higher. While borrowing costs have risen significantly, potential homebuyers are facing less financial stress than expected.

Canada's Housing Market shows Signs of Recovery

The BoC had stopped raising interest rates in March 2023 after more than eight consecutive increases. The Canadian economy had managed to contain inflation enough to be ready for a "conditional rate hike pause" based on the effect of rate hikes so far.

However, a recovery in the housing market could boost economic activity and contribute to higher prices, leading to inflation. Housing costs account for 30% of Canada's consumer price index, with the median price for a home in Toronto rising consecutively since January 2023.

One of the reasons why the real estate market was able to stabilize so quickly was a lack of forced selling, thanks to low borrowing costs. Nevertheless, the Royal Bank of Canada recently warned of a potential risk of mortgage delinquency rising by over a third in the next year. Additionally, stress in the US banking sector could spread to Canada, adding more concerns.

The BoC's upcoming "Financial System Review," an annual examination of financial system stresses, will be released on March 18. This may help identify trends that could impact the housing market and financial sector. However, supply shortages, record immigration, and labor market strength have lowered pressure on the BoC to raise interest rates.

Overall, the housing market recovery brings some positive economic signals but could also create inflationary pressures that the BoC may need to address. Experts and markets are now paying close attention to determine the ultimate effect of these trends.