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Multiple for-sale and sold real estate signs in Mississauga, Ont., on May 24. Changing conditions have brought supply and demand back into balance after tightening surprisingly quickly in the spring, say experts.Nathan Denette/The Canadian Press

The Bank of Canada’s back-to-back interest rate hikes put a damper on the housing market rebound this summer, with sales edging down in July for the first time in six months.

Royal Bank of Canada economists Robert Hogue and Rachel Battaglia say extremely hot weather and massive forest fires may have held back activity in some regions as well.

New listings have now surged 24 per cent since April, they note.

These changing conditions have brought supply and demand back into balance after tightening surprisingly quickly in the spring, they add.

The spring rebound in sales across the country led to a bounce in prices in the Teranet-National Bank national composite house price index in July, according to National Bank of Canada economist Daren King.

The composite HPI, which covers 11 major markets in Canada, jumped 2.4 per cent from June to July on a seasonally-adjusted basis.

Mr. King notes that the rise was the second-highest increase in a single month after the gain recorded in July, 2006.

Halifax led the way with a 4.9-per-cent jump, followed by Hamilton with 4.4 per cent, Vancouver with 3.9 per cent and Toronto, 3.5 per cent.

Compared with July, 2022, the composite index slipped by 1.9 per cent, with Toronto down 2.1 per cent.

The Teranet-National Bank HPI tracks prices after they have been recorded at land registry offices, which means the numbers lag those of local real estate boards.

On a year-over-year basis, the largest declines were seen in St.-Catharine’s-Niagara with a 10.5-per-cent drop, Brantford with 9.08 per cent and London with 9.25 per cent.

Some smaller markets have seen sharp drops from their peak prices in the spring of last year.

Canada’s costly housing market needs a reality check

On a seasonally adjusted basis, the Peterborough, Ont. index decreased 16.3 per cent from its peak in May, 2022. Windsor, Ont. fell 15.1 per cent in the same period. Abbotsford-Mission, B.C. slid 14.2 per cent from the index peak in April, 2022.

Mr. King says index prices could continue to rise in the third quarter, bolstered by strong population growth and tight supply.

After that, however, prices will likely face headwinds as recent interest rate increases hamper affordability and the economy loses some buoyancy, Mr. King cautions.

As for sales in July, the national picture shows a small dip of 0.7 per cent on a seasonally adjusted basis.

Saskatchewan, Quebec and Alberta saw stronger sales, Mr. King points out, but British Columbia and Ontario saw their upward trend reversed.

In the Toronto area, sales fell 8.7 per cent in July from June following an 8.5-per-cent decline the previous month.

On the supply side, Mr. King says, new listings rose 5.6 per cent nationally in July to mark a fourth consecutive monthly increase.

The number of months of inventory, which measures how long it would take to sell all available listings at the current pace of sales, rose to 3.2 in July from 3.1 in June. That’s higher than the trough of 1.7 during the pandemic, Mr. King says, but low on a historical basis.

Looking ahead, Mr. King says the growing impact of interest rate hikes and his expectation of a slower labour market may lead to a loss of momentum in real estate in the months ahead.

Record demographic growth, however, will likely prevent a significant drop in activity, he adds.

Farah Omran, senior economist at Bank of Nova Scotia, believes the spring sales rally was premature. Ms. Omran points to a widespread conviction in the real estate market that the Bank of Canada was finished with its rate hiking cycle and that cuts were imminent as a reason for the optimism.

The resurgence in some part fueled the central bank’s decision to resume tightening in June and adopt a more hawkish tone on the outlook for future hikes, she says, because the action undermined the efforts of policy makers to slow down economic activity and bring inflation back to the Bank’s 2 per cent target.

The Bank of Canada’s increases in June and July, along with the change in tone, pushed variable and fixed mortgage rates up, she adds, leading to higher borrowing costs and slower demand.

“We continue to believe that the bigger driver of the slowdown in housing activity in recent months is the uncertainty effect created by the Bank of Canada actions,” Ms. Omran says in a note to clients.

The Bank signalled that a pause is not a guarantee of an end, she adds, leading potential buyers to realize that the future of rates, inflation and economic activity remains uncertain.

The Bank’s message also helped to thwart speculative activity because investors are even more sensitive to the suggestion of higher borrowing costs for longer, which could in turn mean lower profits, Ms. Omran adds.

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