Canada’s housing market has ‘rebounded sharply’. As rates rise, can it last?

Canada's housing market started to rebound this spring amid a pause in interest rate hikes. With the central bank resuming its tightening cycle, here's what to expect.

The Bank of Canada’s return to interest rate hikes will not be enough to fully tamp down an uptick in activity in the housing market, argues a new report from Desjardins.

Signals from the Bank of Canada that its interest rate tightening cycle had possibly peaked in January gave way to a housing market rebound in the spring, as April and May saw sales figures surge and prices begin to creep higher after a year-long correction.

“Canada’s housing market has rebounded sharply since March,” reads the report released Friday morning from Desjardins’ senior director of Canadian economics Randall Bartlett and principal economist Hélène Bégin.

But the authors note the stability that returned to the housing market in early 2023 coincided with the “prolonged pause” in rate increases that ended earlier this month. The central bank delivered another 25-basis-point hike amid signs inflation would prove stickier than initially forecast.

Desjardins expects another quarter-percentage-point increase at the Bank’s next decision on July 12, with the “door left open” for more hikes down the road.

“We think this will help to keep a lid on further increases in housing market activity in the next few quarters,” the authors wrote.

But, will the return to rising interest rates trigger another correction? Here, Desjardins believes the housing market has a bit of “staying power.”

On the demand side of housing, Desjardins economists note Canada’s population is growing at its “fastest pace in decades” tied to higher immigration levels, alongside similar growth in non-permanent residents.