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Canadian home prices and sales dropped in May in a second straight month, as a sharp jump in borrowing costs rattled the market and made it harder for homebuyers to get a mortgage.

The national home price index, which adjusts for pricing volatility, fell 0.8 per cent to $822,900 on a seasonally adjusted basis, according to the Canadian Real Estate Association (CREA), with bigger declines in what had been some of the country’s hottest markets – Southern Ontario and Chilliwack, B.C.

The number of home resales dropped 8.6 per cent from April to May on a seasonally adjusted basis, bringing the level of activity back in line with prepandemic times, CREA said. Sales were down in three-quarters of the country, with double-digit declines in places such as the Vancouver region, Victoria, Calgary and Ottawa.

CREA said it had predicted that the housing market would eventually slow when interest rates started to rise, but it did not expect rates and mortgage costs to climb so quickly.

“What is surprising is how fast we got here,” said Shaun Cathcart, the association’s senior economist, in a news release. “That cooling off of sales and prices seems to have mostly played out over the last two months.”

The interest rate on a five-year fixed mortgage reached 4.41 per cent last week, according to data from the Bank of Canada. That compares with 2.99 per cent in early March and 2.21 per cent a year ago. Borrowing costs will continue to rise as the central bank continues to hike interest rates to combat runaway inflation.

Samantha Brookes, the chief executive of brokerage firm Mortgages of Canada, said borrowers are shocked when they see fixed-rate mortgages above 4 per cent and are asking about their options. “They’re like, ‘Well, I have a 1.75 per cent right now.’ I’m like, ‘Well, you’re going to have a 4.19 per cent soon,’ ” she said.

Robert Kavcic, senior economist with Bank of Montreal, said this new interest-rate reality is starting to fully sink in with borrowers. “A correction in Canadian housing is well under way across a number of markets, and a long, cold summer likely lies ahead,” he said in a research note.

That correction is taking place in Ontario’s suburbs and less populated cities, which saw some of the biggest gains over the first two years of the pandemic. Cambridge’s home price index was down 4.6 per cent from April to May. Guelph and London, Ont., were down more than 3 per cent. Brantford and Kitchener-Waterloo dropped more than 2 per cent.

Over the past three months, Cambridge’s home price index has fallen 13.5 per cent, while London and the Toronto suburb of Oakville-Milton are down just over 9 per cent.

Ms. Brookes said some homeowners who bought during the peak this January and February are contemplating selling. “They can’t afford it. So they’re thinking that they need to sell, but they may take a loss,” she said.

New listings climbed 4.5 per cent from April to May as more homeowners either put their homes up for sale or had to relist their properties.

Compared with a year ago, the home price index was up 20 per cent; in January and February, the year-over-year increase neared 30 per cent.

Interest rates and inflation are closely linked, which is why the Bank of Canada has been pushing up its key rate to try to keep inflation to a target of 2 per cent. But it’s a careful balance between controlling inflation and not tipping the economy into a recession.

The Globe and Mail

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