For the first time since 2010, five-year fixed mortgage rates are all above 4%

Author of the article: Pamela Heaven
Publishing date: May 09, 2022

Home prices have also begun to cool. PHOTO BY VICTOR J. BLUE/BLOOMBERG

Good Morning!

The numbers are in and, as one economist puts it, April was the cruellest month for the housing market.

Home sales data show softening in Canada’s four largest markets, especially Toronto, where prices may have peaked, says RBC Economics.

“All evidence points to the Bank of Canada’s rate tightening cycle starting to have an impact,” wrote RBC economist Carrie Freestone.

The drop in sales and slowing home price growth signals a market shift is underway, says RBC.

Sales in April fell 26% in Toronto from March, 22% in Calgary and 17% in Vancouver. “Apart from the early pandemic shock, Toronto’s decline in home sales was the sharpest single-month decline since the market correction in the late ’80s,” wrote Freestone.

Aside from Calgary and Edmonton, home sales in other major Canadian markets have sunk below their pre-pandemic levels, says Capital Economics.

Prices have also begun to cool. Toronto prices dropped 6.4% in April on a seasonally-adjusted basis from the month before, the worst drop since April 2020, when the pandemic basically froze the market. Vancouver prices rose 1% but that’s half the average pace over the past six months, said RBC.

Another important indicator is sales-to-new-listings ratios which declined in Toronto, Vancouver and Montreal as fewer Canadians listed their homes, and those who did, saw them sitting on the market longer, said Freestone. Among major markets, only Calgary saw the ratio rising higher into seller’s market territory.

“April proved to be the cruellest month for the housing market, with the recent jump in mortgage rates causing large falls in sales across the country,” wrote Capital’s senior Canada economist Stephen Brown.

For the first time since 2010, nationally-available uninsured 5-year fixed rates are all above 4%, writes mortgage analyst Robert McLister in his newsletter.

The cheapest is 4.04%, a rate that is two-and-a-half times the record low of 1.64% seen just 16 months ago, he said.

McLister cites TD research that estimates 5-year fixed rates have increased 140 basis points year to date, which equals about a 12% decline in affordability for the average homebuyer.

Past periods of rising rates have reduced housing activity by 10-22% in the following year, said TD.

April’s slump in home sales along with the unexpected fall in hours worked seen in Friday’s job data could weigh on GDP, said Capital, which estimates the drop in real estate activity alone could shave 0.2% off the month’s gross domestic product.

A fall in April’s GDP is unlikely to bring a pause in the Bank of Canada’s hiking cycle, said Brown, “nevertheless the plunge in home sales still reinforces our view that the Bank is underestimating the impact that tighter monetary policy will have on the economy.”

Capital expects that further drops in home sales and a “marked decline” in residential investment in coming quarters will push GDP growth down in 2023 and cause the Bank to pause its tightening sooner than markets expect.