Canadian home prices fell for a sixth straight month, deepening a sharp downturn that’s been spurred by the central bank’s rapid interest rate increases.
Benchmark home prices fell 1.6% in August compared with July, to C$777,200 ($589,800), according to data released Thursday by the Canadian Real Estate Association. That brings the cumulative drop from February’s peak to 7.4%.
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The Bank of Canada is in the midst of one of its most aggressive rate cycles in its history, raising mortgage costs for prospective homebuyers and chilling Canada’s once-scorching housing market. The swiftly changing environment and the uncertainty it has spawned has also depressed transactions, with the number of sales down 25% from from a year earlier.
The central bank has moved its policy rate from 0.25% to 3.25% since March, and traders and economists are betting it will raise again next month. That has lifted the interest rate on variable mortgages offered by major lenders including Toronto-Dominion Bank and Royal Bank of Canada to more than 5%.
“We’ve never seen interest rates increasing at such a pace for decades,” Daren King, an economist at National Bank of Canada, said in an interview before the figures were released. “So buyers, and even sellers, are waiting to see where interest rates are going to stop increasing.”
The price declines have been steepest in the areas of Ontario and British Columbia that had the fastest gains earlier in the pandemic. The biggest drop last month was in Chilliwack, British Columbia, where prices fell 6.5% from July, and Sudbury, Ontario, where prices slid 5.3%. Values dropped 1.9% in Greater Toronto and 1% in Montreal.
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In the West Coast province of British Columbia, all of the major communities tracked by the real estate association had price declines during the month. East Coast cities including the Halifax-Dartmouth area in Nova Scotia and Fredericton, New Brunswick, also saw losses. Prices were mixed in the prairie provinces, with Calgary and Saskatoon, Saskatchewan, showing slight gains while Edmonton and Winnipeg posted declines.
The slump has taken a bite out of Canadians’ wealth, reducing the value of households’ residential real estate holdings by C$419 billion in the second quarter.
Still, households remain much better off than before the pandemic, with the value of residential real estate holdings up by C$2.3 trillion over that time. Most Canadian homeowners are still sitting on healthy price gains that were fueled by the emergency-low rates meant to stimulate the economy during the crisis.
Longer-term, Canada has a shortage of housing, especially in the context of its strong, immigration-driven population growth, National Bank’s King said. Those factors, as well as the possible start of interest rate decreases by the end of 2023, could eventually help to stabilize prices, he said.
However, unknown factors such as market psychology and how much the rate increases will slow the economy will play a role in how long the housing downturn persists, King said.
“That’s the whole point of the monetary policy: to slow down inflation and also to slow down the housing market. The Bank of Canada is doing that on purpose,” King said. “Now, are they overshooting, are they doing too much? That’s the question that every economist is asking right now.”