Waterloo Region – Economists warn that sharp interest rate increases too quickly could lead to a correction in the Waterloo region housing market.
With prices continuing to rise – albeit at a slower pace – across the country, a call for higher interest rates amid inflation fears has the country’s central bank walking a tightrope as it attempts to lead the country through the COVID-19 pandemic.
The extremely fragile housing market is one area the central bank says it is watching like a hawk as it looks to 2022 and beyond.
Paul Beaudry, Deputy Governor of the Bank of Canada, gave three main reasons for the nearly 30 per cent rise in the Canadian housing market over the past year.
First, he said, people who work at home and take care of children want more living space. Second, many households in which Canadians kept their jobs had few options to spend their money and “boost up” their savings. And thirdly, low borrowing costs have given the population an incentive to enter the housing market.
However, the increase in housing demand was not matched by a corresponding increase in supply. This has resulted in prices rising sharply in many markets.
He said that expecting continued price increases could be “self-fulfilling,” but it could expose certain markets to the possibility of a correction.
As the central bank grapples with rising inflation – now hovering around 5 per cent – it should also take into account other factors such as the weaker Canadian dollar, the struggling Canadian economy and increasing household debt that is largely bolstered by higher house prices.
While he has already indicated that a rate hike may come as early as March, the question now turns to how high it will go, and the pace at which those increases will come.
Excess speed can be disastrous for new homebuyers, who incur more home debt than at any other period in Canadian history.
Those who buy in the Waterloo area are no exception.
The Kitchener-Waterloo Association of Realtors reported a median sale price of $997,654 for detached homes in October, up 34.2 percent — or more than $250,000 — compared to October 2020, and 3.5 percent higher than September’s results.
It was a similar story in Cambridge, where its association said the separate October average was $888,683, a year-on-year increase of 33.3 percent – about $222,500 – and 4.7 percent higher than in September.
As the district looks to achieve its aggressive expansion goals over the next few decades, mass immigration and the continued expansion of the technology corridor should keep housing demand in the area very strong.
“The fundamentals (for the region) are very strong when it comes to supply versus demand,” said Benjamin Tal, deputy chief economist at CIBC World Markets Inc. Derailing the market – not to a major correction but an adjustment of say about 10 per cent…but for that you need prices to rise quickly.”
Some economists have forecast up to eight interest rate increases in 2022 and 2023 to help curb inflation, but other factors outside of inflation may force the bank to take a slower approach to its increases.
David Carruthers, chief economics analyst at Canada Mortgage and Housing Corporation, said the Canadian housing market as a whole has gone from moderately weak to high.
He said it does not have a specific vulnerability index for the Waterloo area, but comparisons with neighboring communities such as Hamilton and the greater Toronto area often reveal similar trends – both of which are currently listed as very weak.
He said vulnerability is a relative measure and doesn’t talk about the likelihood of something happening, but it does illustrate the high risk.
“The fact that there is such a high level of vulnerability in these key neighboring markets, suggests that there could be some spillovers.”
As part of a recent housing market outlook report — economist Jennifer Cao covered Waterloo — prices are expected to continue growing into 2023, but not at the pace seen during the pandemic, and more in line with historic annual growth.
“If a price increase occurs faster than our expectations, resale market activity is likely to move towards the lower end of the forecast range,” Cao wrote. “Conversely, if rates remain lower for longer than expected, home sales and prices may be stronger than expected.”
But home prices are not just a result of interest rates.
“When interest rates go up, we expect there will be downward pressure on prices, but the way prices develop will be from a whole bunch of different pressures,” Carothers said. “So while we may have interest rates putting downward pressure on prices, we still have a lot of other factors putting upward pressure.”
At the top of that list is the housing supply, and the area has one of the lowest in the country. As of October, Kitchener-Waterloo had about two weeks of stock available in the market, making it the third narrowest market in the country after Orangeville and Durham – both sub-regions of the GTA.
Carothers said new construction will be critical to stabilizing the market.
When you move away from short-term expectations and look at the longer-term outlook for the region, he said, the ability to keep building new properties to meet demand will have a significant impact on the shape of future home prices.
-With files from Brent Davis