The impact of the interest rate hike has had reverberations throughout the housing and development industry, with many developers pausing or canceling projects and consumers waiting to see where interest rates will ultimately land. The Bank of Canada (BoC) had been raising interest rates throughout 2022, but they recently signaled that they are done with the rate hike cycle. However, their last meeting still raised rates by a quarter basis point.
The BoC’s interest rate hike was driven partly by a fear of entrenched inflation, but data from the last quarter shows that both core and headline inflation have been on a small but downward trajectory. This may ease the BoC’s concerns about inflation, but it remains to be seen whether they will reverse their recent interest rate hike.
Meanwhile, the Canadian government has been grappling with a severe labor shortage across many sectors as more boomers accelerate their retirement. To address this issue, the government awarded a record-breaking 600,000 new permanent residencies and temporary work permits in 2022 and has pledged to bring in more immigrants to compensate for Canada’s aging demographic and population deficit. Increased immigration levels are expected to buttress housing demand and provide a support level for housing prices.
However, the housing and development industry faces several challenges, including a long rezoning process, a scarcity of land, and a lack of skilled labor. These issues, combined with two to three years of under-investment and paused or canceled projects, have led to low inventory. This is already evident in the housing data. When supply is scarce, and demand is high, the price of the underlying service or product (in this case, housing) can only go up. This is particularly concerning given that the job numbers are strong, unemployment is low, and wage growth is high. The fundamentals will always prevail in the medium term, and the market only needs a small spark to trigger another price surge. This could come in the form of a rate cut once the BoC and the Federal Reserve Board realize that they have gone too far with interest rate hikes and begin to cut rates back down.