Home Sales, and Prices Plunge as Interest Rates Spike

Home Sales, and Prices Plunge as Interest Rates Spike

  • Claudine Montano
  • 08/17/22
The Canadian housing market cooled down in June, with sales and prices dropping in the wake of rising interest rates.

The Canadian Real Estate Association (CREA) reported on Friday that sales in June fell by 23.9% compared to last year. The declines were seen across most markets in the country, with the most populated areas seeing the largest drops. Sales fell by 5.6% in June, marking the fourth straight month of decline. This was more moderate than the drops seen in April and May, however, the price of an average home has also fallen. CREA says the median home price in Canada is down 1.8 percent from last June, to $655,850. While this marks a moderate decline from 2021, the average home price has fallen sharply since record highs were hit in February.Prices have decreased by more than $150,000, or more than 18%.

The CREA trade association states sales activity has slowed in the face of rising interest rates and uncertainty. At the moment, the cost of borrowing is a bigger factor affecting housing markets than the availability of housing. However, the availability of housing hasn't gone away, so the market is still unstable.

The MLS Home Price Index (HPI) fell by 1.9% on a monthly basis in March. This is a more accurate price comparison than the median or average price, according to CREA. There has been a noticeable decline in the stock market in the past year, according to Bloomberg News. The national average price of a home was $541,350 in August, according to the Canadian Real Estate Association.The majority of the month's sales declines were seen in Ontario, but prices have also eased in parts of British Columbia. It is stated  that prices are mostly flat in the Prairie provinces, while Quebec is showing small signs of declines.

The slowdown in the housing market is likely due to the Bank of Canada's recent decision to tighten monetary policy, which is in response to high levels of inflation. This week, the Bank unexpectedly raised the interest rate by 100 basis points, bringing the rate to 2.5 percent. The benchmark interest rate, which is set by the central bank, was 0.25% at the start of the year.This has led to price increases for Canadians, including those with variable-rate mortgages and home equity lines of credit.

BMO Capital Markets state that recent sales figures suggest that the housing market is "seriously wobbling" before the Bank of Canada's full percentage point hike is taken into account. The period of extreme demand has come to an end, and we are on track for a weak year in terms of resale volumes and prices.

The bottom line is that the market was already in a decline after the Bank of Canada's initial move on rates, which only confirms how sentiment-driven the market was.

The housing market in Canada is continuing to decline as interest rates continue to increase. We believe that there is about a 50/50 chance of a recession in 2023. Investment in residential property will be the main culprit behind this.

Work With Claudine

With more than a decade of experience, Claudine Montano possesses a strong business acumen of Toronto’s constantly evolving real estate market. Claudine Montano is a Broker of Record with RE/MAX Hallmark Montano Group Realty affiliated with RE/MAX Hallmark.

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