Canadian real estate has another indicator showing higher rates are tempering the market. A new analysis from BMO Capital Markets shows housing-related retail sales fell in April. They attribute this to higher rates, and see this as a direct follow up to falling real estate sales. Activity remains elevated but BMO sees things slowing further as rates climb.
Canadians Are Spending Less On Home Building and Renovation Materials
Higher interest rates aren’t only slowing real estate sales, but related spending too. April retail sales showed a drop of 4.3% for the “building materials, garden equipment, and supplies segment.” It was the first decline since last summer, though it’s still elevated compared to typical levels.
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“As the chart shows, sales in this category still have a long way to go from still-elevated levels—juiced by demand for housing and renovations during the pandemic,” said Shelly Kaushik, an economist with the bank.
“Still, it looks like a more aggressive tightening path by the Bank in April cooled some of that demand as sales of building materials fell for the first time this year.”
Falling home prices may also be a large contributor to this cooling trend. In addition to fewer flippers, a large share of home improvements are funded by home equity.
At the start of 2020, over a third (35%) of homeowners looking to renovate said they planned to tap their HELOC to pay for it. An additional 23% planned to refinance their home to fund their renovation. Soaring home prices provided more renovation funds to play with and falling home prices may remove some of those funds.
Canadian Real Estate To Slow Further, Warns Bank
The slowdown from higher interest rates is far from over, with more rate hikes expected. “Looking ahead, another drop in home sales in May and the potential for even more aggressiveness from the BoC should cool the housing market further in the coming months,” said Kaushik.