By Ketki Saxena
Investing.com -- With interest rates on the rise in Canada, and expected to stay high for the remainder of the year, the big question is: what happens next to the Canadian housing market?
After a rebound in the spring, the summer seems to show a moderation in Canadian housing activity.
After six months of robust activity, home sales dipped 0.7% month-over-month in July, putting an end to six months of heightened activity.
Supply meanwhile increased, as new listings rose 5.6% on a monthly basis.
However, improving supply-demand fundamentals - and another interest rate hike - did little to depress prices: the MLS Home Price Index (HPI) climbed 1.1% from June to July (although price increases did decelerate from the 1.9% average seen in Q1 of 2023).
Here's what economists anticipate will happen next.
In a recent housing market update from RBC (TSX:RY), Robert Hogue, Assistant Chief Economist, and Rachel Battaglia, Economist, call for a muted downturn in Canadian housing.
They expected prices will "continue moderating in the months ahead," as high-interest rates put downward pressure on prospective homeowners’ budgets, leading to a balancing of supply and demand fundamentals.
"The path ahead for Canada’s market is likely to be bumpy," Hogue and Battaglia said.
"We expect higher interest rates to keep curbing buyers’ enthusiasm for months to come, while possibly forcing the hand of some current owners to sell."
Farah Omran, Senior Economist at Scotiabank (TSX:BNS) also writes that sales numbers seen in July indicate a "more sustainable level of housing activity."
However, this "does not mean all is well with Canada’s housing market", and is unlikely to lead to greater affordability.
"Affordability remains out of reach for many first-time home buyers and supply continues to lag," Omran said, with price increases continuing to reflect "fundamental imbalances in market conditions."
In fact, a recent report from Ratehub.ca shows that between June and July, soaring mortgage rates and a higher barrier for stress tests have led to a continued deterioration in Canadian housing affordability - even in markets where prices declined or stayed flat.
Robert Kavcic of BMO (TSX:BMO) Economics also sees a moderation in Canadian real estate, noting that 'The current environment suggests that investors are backing away from real estate, largely because the cash flow arithmetic doesn’t compute, and robust price gains are far less certain."
Kavcic also highlights some of the negative consequences of the moderated pace of activity in Canadian housing.
Kavcic notes, that housing market speculation "is a double-edged sword. On the one hand, outright speculation adds to market froth, stretching valuations and affordability. At the same time, investors help bring new projects to construction and much-needed rental units to the market"
"A dearth of investment demand would weigh on new construction in the years ahead”
RBC analyst Geoffrey Kwan, meanwhile is amongst those who remain bullish on Canadian housing, believing that it is likely it will avoid a serious downturn.
Kwan acknowledges that “On one hand, there are multiple risks both near-term (e.g., high interest/mortgage rates, weak/severe housing affordability issues) and medium-term (e.g., potentially substantial mortgage renewals in 2025/2026)."
However, he notes that "mitigating factors" include the "Canadian Government’s plan for substantially higher immigration over the next few years coupled" - while there is "little evidence suggesting there is a credible plan to substantially increase housing supply, which has failed to keep up with demand for arguably decades. "
"As such, we think it’s possible the Canadian housing market could potentially avoid a severe housing downturn”