Five Things You May Not Know About Canada’s Historic Housing Correction

This is quite a ride that the Canadian housing market has been on. During the pandemic record low interest rates helped push sales and prices to dizzying heights. The descent down after the Bank of Canada started raising interest rates in March has been equally astounding.

Small wonder that back in July RBC economists predicted this would be a historic correction. 

Recently CIBC economists Benjamin Tal and Katherine Judge took a closer look at the reset of Canada’s housing market. Their analysis contains a few records set during this downturn and a few things you might not know.

Record-breaking swoon

Home sales had fallen for eight straight months before October brought a small uptick. Not only is that the longest stretch of falling sales on record, it is also the steepest, said the CIBC team. “And it’s not really over yet.”

Putting prices in perspective

Prices are also setting records. With the average price of a home in Canada down 20% since February the correction is already the steepest on record, said Tal and Judge. But it’s also a matter of how you look at it. When the descent is viewed from the perspective of how high prices climbed before the correction, this fall is the mildest of the five housing downturns since 1981.

How you measure prices also makes a difference. Tal and Judge say the average home price index can be deceiving because it averages all prices and doesn’t take into account the composition of the sales. If more of less expensive units are sold then it can lead to a decline in the index even if prices are rising.

They prefer the Canadian Real Estate Association composite index which focuses on price changes in similar properties. A comparison of the two measures reveals that almost half of the 20% drop in average prices since February is due to the composition of sales — reflecting lower sales in expensive homes. That is backed up by reality, the economists say, with detached homes seeing the largest drop in prices and condos the smallest.

Sellers still on the sidelines

A lack of new listings is another thing that sets this housing downturn apart. CIBC says available inventories are now at double the level they were during the pandemic, but still well below levels before COVID. Toronto and Vancouver are now back to pre-pandemic levels but inventories are still below their long-term average.

The economists say sellers continue to sit on the sidelines with hardly any signs of distressed selling so far. “The abnormal behaviour of supply this time around has, so far, worked to limit the magnitude of the price decline,” they said.

No vacancy

Home sales might be slowing but the rental market has never been tighter, said Tal and Judge. With an estimated 700,000 people coming into Canada this year “demand for rental units is at a record high,” they said.

And market forces are working to make it tighter. Over the past year the cost of owning a home has risen much more rapidly than the cost of renting one, reducing investor demand in the condo market, a major source of rentals.

The CIBC team estimates that about a third of investors in this market were in negative cashflow territory before the pandemic. Those numbers will have swelled as interest rates climb.

“Add that to the recent notable decline in condo-presale activity and the delays/cancellations of purpose-built projects due to escalated costs, and you have a sure-fire recipe for an even tighter rental market in 2023,” they said.

Back to balance

The majority of housing markets in Canada, 60%, are expected to be balanced by 2023 as sales and prices decline. This comes from Re/Max Canada’s housing market outlook released on November 29 and is based on analysis by brokers across the country.

Re/Max says the Greater Toronto Area, Greater Vancouver Area, Calgary, Regina and Winnipeg are already in balanced markets “in what is being called a healthy development.” Ottawa, Montreal and Halifax continue to be sellers’ markets.

Source: Financial Post

It’s Too Early to Tell if Housing Market Has Hit Bottom

In a new interview, Chris Alexander, president of Re/Max Canada, talked with the Financial Post’s Larysa Harapyn about the housing market in Canada. Data for the month of October shows that home sales activity increased, however Chris says its too early too tell if Canada has hit the bottom of sale activity and is on the rebound. Many relators are cautiously optimistic though. 

With the Bank of Canada increasing interest rates this year, the market has seen quite a slow down which Chris calls a welcome reprieve from the runaway prices earlier in 2022. While the housing market has calmed down, future rate hikes could still impact the market. 

Home prices were down again in October. This is the eighth consecutive month of declines, however its important to note that these numbers are being compared to 2021 which was a record smashing year. Chris pointed out that the declines since August have been quite small and he expects to see some stability soon. 

Looking ahead to the spring market, Chris expects mortgage rates to stay around 5%-6%. Outside of the largest cities like Toronto and Vancouver in areas where house prices are around $500,000 or less, this can be an affordable mortgage for potential home buyers. 

To watch the full interview, visit the Financial Post website. 

Source: Financial Post

New Construction Home Sales in Toronto Region Down 53% in October

There are signs that the interest rate shock to new construction home sales may already be abating slightly in the Toronto region despite record lows for the month of October, according to the homebuilders’ association.

October sales of pre-construction and newly built houses and condos was down 53% year over year — the lowest for that month since 2008, the Building Industry and Land Development Association (BILD) reported. But October’s 2,007 sales, including 1,601 condos and 407 single-family homes, was higher than September’s historic low when only 334 houses and condos sold. The price increase of new and pre-construction homes also moderated in October. 

“As we see the escalation of interest rates potentially come to a conclusion, the market is adjusting to that,” said BILD CEO David Wilkes. He noted that employment remains high in the GTA even as the housing market has paused.

“The market is looking for stability in monetary policy and interest rates. All signs point to the fact that once we get to that period of stabilization, we are going to see activity rebound. Demand long term is not going away. So it’s just consumers adjusting to different conditions,” he said.

Single family homes — towns, semi-detached and detached houses — saw 65% fewer sales than October 2021 — the fewest in that category since 2000. Condo sales declined 50% year over year.

Prices continued to increase on an annual basis. The benchmark price of a new condo rose 9% to $1.15 million year over year, down from about $1.16 million in September. Single-family home prices also saw 9.6% growth annually in October to $1.81 million, down from about $1.85 million in September.

The price moderation was largely a result of the housing projects that launched during the October sales period, said Ed Jegg of Altus Group, which tracks new construction home sales and prices. Among the 485 single-family homes that sold, seven of the 19 projects were townhome offerings, which sell for less.

There were seven new highrise launches offering 1,235 units for sale, said Jegg. Four of those were outside Toronto, where traditionally prices are lower than downtown and two of the Toronto projects were weighted to smaller, less expensive condos.

New home inventory levels didn’t change significantly from September with four to five months’ supply available for sale. BILD says nine to 12 months is required for a balanced market.

Wilkes stressed that the industry is supporting the provincial Progressive Conservative government’s legislative agenda to increase housing supply, including the sweeping More Homes Built Faster Act that is considered the biggest change to Ontario’s planning regime since the growth plan was introduced more than 15 years ago.

Premier Doug Ford also recently announced a plan to open up parts of the protected Greenbelt area to home development and has introduced new strong mayor powers to municipalities, including Toronto, in the name of hitting that mark. “The legislative package that the provincial government has put forward is saying that we do need a new approach. We do need to address some of the root causes that have caused the affordability problems and the prices that new homebuyers are looking at. And we believe that this legislative package does set that course and provides leadership that is necessary,” said Wilkes.

Source: The Star

Canadian House Prices Expected to Tumble 17.5% 

Once burning-hot Canadian house prices are expected to tumble a total 17.5% from their peak, roughly double the fall during the 2008-09 financial crisis, in a slowdown already well underway, according to a Reuters poll of market experts.

A succession of rapid-fire Bank of Canada interest rate rises that has taken the overnight rate from near-zero to 3.75% in just eight months has removed some steam from the market, with a doubling in the average five-year mortgage rate to near 5%. But after a more than 50% rise in house prices during the pandemic on top of what was already seen as one of the world’s most expensive property markets, that expected fall would not be enough to bring prices to affordable levels.

With a debt to disposable income ratio of 1.84, Canadian households are among the top most indebted in the world and more vulnerable to higher rates given their higher exposure to variable rate mortgages.

Peak-to-trough correction forecasts in the Nov. 8-22 poll of 12 property analysts ranged between 10% — about how much the market has already fallen — and 30%.

Tony Stillo, director of Canada economics at Oxford Economics, said higher mortgage rates and the panic run-up in prices during the pandemic had kept the average cost of housing “35% above the borrowing capacity of median income households.”

“Our forecast for a 30% decline in house prices in conjunction with steady income growth, a stabilization in mortgage rates and stronger growth in housing supply … will cause house prices to return to an affordable range by late 2025,” he said.

House prices need to fall 25% from peak to trough in order to make them affordable, according to the median response to an additional question. Responses ranged from 18% to 35%. That was in line with BoC senior deputy governor Carolyn Rogers who said that house prices needed to fall to restore balance to the housing market.

After rising 11.8% in 2022 compared with 2021, average house prices were expected to sink 10% in 2023 and increase 1.3% in 2024, lagging consumer inflation, according to the median forecast in the poll.

“We have a unique situation where demand has cracked and buyers can’t qualify for, or afford, early-year prices. But, outside some areas, there’s not a bounty of listings to choose from, and sellers are still able to say ‘no thanks’,” said Robert Kavcic, senior economist at BMO Capital Markets.

Housing starts fell 11% in October as sellers held off listing in hope of a spring rally and surging borrowing costs dragged demand.

The central bank’s overnight rate was priced by markets to peak at 4.25%-4.5% in 2023 as consumer inflation is well over three times the BoC’s 2% target.

House prices in Toronto and Vancouver, regional epicentres of the biggest price booms in recent years, were forecast to drop 11% and 9.3% in 2023 after rising as much as 58% and 35% since the pandemic started.

Asked to rate average Canadian house prices on a scale of one to 10 where one was extremely cheap, five priced about right and 10 extremely expensive, the median forecast from 11 contributors rated it eight. For Toronto and Vancouver, the ratings were nine.

A majority of property market experts said the risk of a crash in house prices was low. During the financial crisis, U.S. house prices crashed by as much as 40% but the Canadian market fell only 9% then. “In more ‘normal’ times before the pandemic, a 30% drop in house prices would be considered a crash. However, in the current context, where home prices surged 50% per cent over just two years during the pandemic, a 30% price correction will still leave home values above pre-pandemic levels,” added Stillo.

Source: Globe and Mail
Source: Financial Post