Real (Estate) Talk | June 2024

The Vancouver Region saw 4,143 MLS sales in May, a 1.8% decline month-over-month in contrast to the usual 5% April-to-May increase. To see momentum slip in what is typically one of the most active months for the region—the peak of the spring housing market—is yet another sign of the times. Housing affordability constraints (i.e., elevated interest rates and home prices) are putting substantial pressure on homebuyers. It is even more notable considering that the spring housing market never really gathered much momentum at all. Monthly sales activity has been trending well-below historical levels through 2024, with year-to-date sales 21% below the prior 10-year average through the end of May (17,566 sales versus an average of 22,265).

 

However, perhaps more important was the news that came out of the Bank of Canada (BoC) after May’s close and the implications for future sales activity. On June 5th, the Bank reduced its policy interest rate by 25 basis points to 4.75%, officially turning the page on one of the most aggressive monetary tightening cycles in Canadian history. The cut itself will do little to alleviate borrowing costs. Rather, it closes months (and perhaps years) of speculation around when interest rates might begin to decline. For borrowers, it is a clear signal that the trajectory for interest rates is downwards.

 

What remains unclear is the pace of that downward trajectory. Tiff Macklem, the Governor of the BoC, stated in his press conference that “it is reasonable to expect further cuts to our policy interest rate” should the economy and inflation evolve as expected. However, he reinforced that the timing of those cuts is unknown and that decisions will be made one meeting at a time.

 

So far, the economic data is looking conducive to further interest rate cuts. One day after the announcement, the May Labour Force Survey showed the unemployment rate ticking higher to 6.2%. Rampant population growth means that the working-age population continues to grow faster than the economy can create jobs. As such, the number of new unemployed people in May (27,700) outpaced the number of new employed people (26,700). The pace of population growth has been masking softness elsewhere too. Despite overall growth in gross domestic product (GDP), per-capita GDP has declined in six of the last seven quarters and is now at 2016 levels. This paired with the fact that all measures of inflation (headline, median, and trim) are trending below 3% is fodder for further interest rate cuts.

 

One reason the BoC might take a more cautious approach to future cuts is the risk of overstimulating housing demand and sending home prices higher. Remember: in January 2023, the mere signal by the Bank that it would hold its policy rate at 4.5% prompted a flurry of housing demand and price appreciation in the months following. As a result, the policy rate would rise to 5% via two more 25 basis point hikes in June and July.

 

What’s different this time, however, is that inventory levels are no longer strapped near historic lows. Active listings in the Vancouver Region reached 19,830 in May, up 50% from May 2023 (13,199 listings) to reach the highest level since September 2019 (19,840 listings). This more healthy balance of inventory will help absorb upward pressure on home prices as more buyers engage with the market in response to future interest rate cuts by the BoC—whatever the pace of those cuts may be.