By Ketki Saxena
Investing.com -- The Canadian housing market has been showing signs of recovery in May after a year-long slump.
Data from the Canadian Real Estate Association reveals that home sales increased by 5.1% in May compared to April, with an annual growth of 1.4%. The Home Price Index experienced a slight monthly increase at 2.1%, while its annual decrease was recorded at 8.6%. Furthermore, the national average selling price rose by 3.2% annually.
A key reason behind this resurgence within the housing market can be attributed to lenders extending debt amortization periods for variable-rate borrowers temporarily, thus shielding them from higher interest rates and preventing forced selling scenarios.
However, it is important to note that these increased borrowing costs have led to slowing residential construction activity over recent months—a factor which may hinder efforts aimed at addressing existing housing shortages and promoting recovery in home prices overall.
Canadian Mortgage and Housing Corporation (CMHC) data released on Thursday indicates that housing starts fell by 23% in May compared to the previous month, reaching a seasonally adjusted annualized rate of only 202,494 units. This is significantly lower than the predicted level of 235,000 starts economists
The resurgence in housing prices is likely to provide support for additional Bank of Canada interest rate hikes in the near future.
Last week, the Bank of Canada raised its benchmark interest rate to a staggering high point not seen since the last two decades at 4.75%. This marked their first hike since January and cited factors such as renewed strength in housing activity as evidence that excess demand is more persistent than initially anticipated.
In response to this change, money markets now predict around a 60% chance that there will be further tightening from the central bank next month.