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Quebec residential property prices: a temporary upturn in July 2023

While rising interest rates have been holding back the real estate market for several months now, the release of CREA’s statistics for July brings two pieces of good news for the Quebec resale market.

Firstly, the 2% increase in sales compared to July 2022, albeit minimal, is encouraging, since it’s the first increase in twenty-six months.

Secondly, average property prices rose for the first time in eight months.

Compared with July 2022, the average price of all property categories in Quebec rose by 2.6% (see figure below).

Too little too late

July’s price rise does not, however, erase the price declines recorded so far in 2023.

For the first seven months of the year, the average price of residential properties in Quebec remains 2.7% lower than for the same period last year. It remains highly likely that our forecast scenario of last November will prove correct, and that Quebec will experience its first decline in property prices in 27 years in 2023. This is so, because July’s upturn is likely to be short-lived, as other clouds loom on the horizon.

Recent developments in bond yields do not bode well for mortgage rates

The fact that inflation is proving more persistent than expected is not good news. This prompted the Bank of Canada to raise its key rate twice again (+0.25 in June and +0.25 in July), just when we thought the upward cycle was over. Variable-rate mortgage rates obviously followed suit.

As for 5-year fixed mortgage rates, it should be remembered that they are not directly dictated by the Bank of Canada, but rather by bond rates, which reflect financial institutions’ cost of funds.

The more persistent inflation becomes, the more investors want a high return to compensate for the anticipated loss of purchasing power (inflation premium).

This is the main reason why, since the beginning of August, the yield on Government of Canada bonds has also been on the rise (see chart below). In mid-August, it even broke the 4% barrier for the first time in almost 15 years.

This means that not only are 5-year mortgage rates unlikely to fall any time soon, but further short-term increases are even possible.

Thus, further negative results in terms of both sales and prices are highly likely over the coming months, so it’s still far too early to announce a lasting recovery in the real estate market. We’ll just have to wait and see.

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