Canadian home sales took a slight dip in September, following a summer of gradual sales growth. So what happened? According to one economist, the rising interest rate environment will keep the market in check for the foreseeable future.

“Looking at the past few months, sales posted relatively solid gains in June and July, driven by a rush of pent-up demand as markets adjusted to [a new mortgage stress test introduced in January],” writes Rishi Sondhi, an economist with TD, in a recent note. “However, activity has eased considerably since then.”

Sondhi calls September’s sales decline a “setback on the road to recovery” for the Canadian market, and says that activity will continue to slowly warm over the final quarter of the year.

Interest rates have been on the rise for months, with the Bank of Canada hiking the overnight rate to 1.50 percent in July. Another hike is likely on its way for October, which Sondhi says should keep sales and prices at relatively modest levels.

“This is consistent with our forecast calling for resale activity to rise at a more moderate pace ….. as increasing borrowing costs and stretched affordability conditions in key markets keep a lid on demand,” he writes.

One market that is struggling more than others? BC, which is dealing with a recent increase to the foreign buyers tax, on top of new mortgage regulations and higher interest rates.

“With ample supply relative to demand, BC home prices are likely to post subdued growth in the fourth quarter, compared to a relatively stronger gain expected for Canada overall,” writes Sondhi.

His predictions echo that of the Canadian Real Estate Association (CREA) earlier this month.

“The balance between the number of home buyers and suitable homes varies depending on location, housing type and price range,” wrote Barb Sukkau, president of CREA. “Differences in market balance will likely come into sharper focus as interest rates rise and cause this year’s new mortgage stress-test to become even more restrictive.”

This Factor Could Keep A Lid on Canadian Housing Activity Through the Rest of 2018 by Sarah Niedoba | Livabl