The bad news personal finance story of the year so far is the housing market revival

A housing market revival is both inevitable and justifiable.

But not now, okay? The country can’t take it.

A housing rebound would feed inflation and help keep interest rates at their current heights for longer than previously thought. People who have paid off all or most of their mortgages would benefit from higher home prices, while younger Canadians with big mortgages and other debts would suffer.

Our housing market is built to a large extent on unfairness. Stand by to see how much worse things can get.

Until last week, inflation appeared to be doing a slow fade that would permit interest rate cuts by late this year or early 2024. But the inflation report for April showed the cost of living was up 4.4 per cent on a year-over-year basis , compared to 4.3 per cent in March. This was interrupted by a nine-month stretch where the inflation rate was declining or flat.

Opinion: A way to persuade homeowners to embrace housing development in their own backyards

What makes this tiny uptick in inflation troublesome is the fact that the housing market appears to be rebounding from a year-long decline. Hotter housing would add to inflationary pressures and contribute to a potential rewrite of the positive outlook for lower interest rates.

Previously, the consensus was that inflation would decline enough by year’s end for the Bank of Canada to start cutting its benchmark overnight rate. Now, economists are speculating about rate increases, rather than cuts. The next opportunities for the Bank of Canada to adjust its benchmark overnight rate are June 7 and July 12. A rate increase could come that soon.

After last year’s interest rate hikes, housing looked down and out. But national resale home prices are now up more than $100,000 since January and have risen for four straight months. “Spring 2023 increasingly looks like the turnaround point for Canada’s housing market after a year-long slump,” RBC Economics said in a report last week.

The housing market was always going to rebound from the price declines of the past year or so, in large part because of high levels of immigration. But the quickness of the turnaround highlights another support for housing: the hunger of Canadians to own homes for both lifestyle and financial reasons.

What a gift it would have been for this housing-mad country if home prices had stayed down for a year or two. Priced-out buyers would have had a chance to save and possibly find affordable homes, and the timetable for interest rate cuts would have been spent up in a way that helped borrowers.

Resurgent home prices will ease the anxieties of recent buyers who have seen big drops in their equity, and boomers hoping to exit their family homes at optimum prices. But there are drawbacks, too.

The Bank of Canada says mortgage payments could spike as much as 40 per cent

Homebuyers who choose variable-rate mortgages and see their borrowing costs rise along with interest rates last year will likely have to wait longer for relief. The outlook for fixed-rate mortgages is similarly unfavorable right now. The financial market interest rates that influence fixed-rate mortgages pushed notably higher last week.

Households have for more than a year battled high interest rates and inflation with impressive resilience. But there are growing signs people are running out of money.

For example, the number of consumer insolvencies jumped 28 per cent in March compared with the same month last year. In financial results for their latest quarter, the big banks disclosed that they have set aside a combined $2.5-billion or so to cover losses from clients who can’t repay what they borrowed.

For ages, the unfairness of housing has been felt in the affordability problem for first-time buyers without healthy six-figure incomes or parental financial assistance. Now, a new phase. Housing’s strength is helping to perpetuate the high interest rates weighing most heavily on people with big mortgages and other debts.

It has to be said that these are the best times for people with paid-off houses, minimal debts and lots of money to save. But if you’re just hanging on financially, rates can’t come down soon enough. Only inflation, with an assist from housing, stands in the way.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.

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