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Rates Increases Finally Taking Hold

8 August 2023

Recent data releases provide the surest sign yet that the spate of interest rate hikes since last spring are finally having their intended impact. While real gross domestic product (GDP) rose 0.3% in May, the more telling data is the June estimate, which points to a contraction. Estimates indicate real GDP fell 0.2% for the month, putting Q2 GDP growth at 1.2% on an annualized basis. The handoff to Q3 is expected to be soft, and growth will likely struggle to remain in positive territory in the second half of 2023.

After a strong start to the year, the jobs market is also showing signs of cooling. The economy lost 6,400 jobs in July – the second decline in the last three months, which suggests that the Bank of Canada’s efforts to rebalance the labour market are working. The unemployment rate moved higher to 5.5% and now stands 0.6 percentage points above the low reached in July 2022. Overall, the economy appears to be struggling to keep pace with the growing labour force, which is up 590,000 (2.8%) in the past year.

Slowing GDP and a soft employment report suggest that the economy is losing momentum. Add in June CPI numbers, which show Canada’s inflation rate fell to 2.8 per cent – its lowest level in more than two years – and there is a strong case for the Bank of Canada to stay on the sidelines. The length of the pause will depend on how long wage and core price growth remain firm.

What does this mean for housing?

Pointing to still-high inflation, strong consumer spending, a rebounding housing market and a labour market that is helping fuel higher prices, the US Federal Reserve announced another quarter-point rate hike at its late-July meeting. US rates have gone up 5.25 percentage points in the last 18 months, and in forecasts published in June, most policymakers expected to end the year with the Fed policy rate at 5.6%, one-quarter point above the current rate.

With the Bank of Canada looking to hold the course on rates and the Fed at or close to the end of the tightening cycle, it could be a while before we see US and Canadian bond rates ease. This will likely keep domestic mortgage rates at elevated levels over the near term, meaning affordability will not get a helping hand from monetary policy. 

Borrowers with a variable rate mortgage are unlikely to see relief until the first quarter of next year. Fixed rate mortgages will likely see some easing as the 5-year bond rate comes down to around 3.5% by year end, with an additional 70 basis points of easing expected though 2024.

Home prices are also expected to remain elevated. In Canada, the national average home price is heavily impacted by two markets: the GTA and British Columbia’s Lower Mainland. In July, the Lower Mainland housing market cooled as higher mortgage rates pushed buyers to the sidelines with deteriorating affordability and softer buyer confidence. While the unadjusted average price fell month-over-month to $1.177 million, it remained 3.6% higher than a year ago. The story for the GTA was similar with the average price falling 5.4% in July to $1.11 million but remaining 4% above July 2022.

Prices are unlikely to see any material decline going forward as housing supply remains limited. Given this lack of inventory is coupled with a tight rental market, we expect to see a low sale, high price environment over the coming months. 

Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.

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