Real Estate

Canadian Real Estate Is Once Again Inflationary, Reinforces Need For Hikes: BMO

Canadian real estate prices are rising, and that’s bad news if you’re looking for cheap credit. Statistics Canada (Stat Can)  reported new home prices made the first increase in nearly a year. In a research note to investors, BMO warned the increase is just one of many housing data points that shows shelter is back to driving inflation. That helps to justify the recent central bank rate hike, and potentially opens the door to further hikes. 

Canadian New Home Prices Return To Growth

New home prices made a small increase, but more importantly ended the losing streak. Stat Can reported the price of a new home increased by 0.1% in May, the first increase since August 2022. Builders attributed the increase to higher labor and material costs, which are still trickling into prices. 

Even though it’s a small increase, it’s a concern to see price growth return already. “The size of the move (+0.08% for the house-only component) isn’t as important as the direction, which is now positive for the first time since the correction began last year,” said Douglas Porter, senior economist at BMO. 

Canadian Housing Is Driving Inflation (Again) 

That’s bad news on the inflation front, and means rates weren’t high enough to temper expectations. “This flows directly into the CPI, and suggests that all major aspects of shelter (choppy utilities aside) are again inflationary,” explained Porter. 

He continues drilling on housing-driven inflation, “Rents are pushing steadily higher; mortgage interest costs are reflecting past rate hikes; replacement cost is again rising; and “other” expenses such as real estate fees are also on the rise with an upturn in resale prices.”  

Bank of Canada all Clear For More Hikes, Recent Move Justified

Higher home prices might be good for owners, but it’s questionable if the net impact is a benefit. Shelter costs trickle into virtually every component of inflation, driving general costs much higher. 

The Bank of Canada (BoC) has repeatedly warned they won’t allow inflation to re-accelerate, and the recent “surprise” rate hike now has more context. 

“This just highlights again why the Bank of Canada likely saw positive momentum in housing as a reason to hop off the bench and raise rates,” said Porter. 

Porter has previously stated he expects at least two more rate hikes. The return of new home price growth likely reinforces that forecast.