Canada’s Housing Market Faces ‘Historic Correction’ That Could See Sales Drop 42%
Canada’s largest bank has downgraded its outlook for the housing market and now forecasts a “historic correction,” worse than any national decline seen in this country in the past 40 years.
Soaring inflation has put the Bank of Canada on a course of aggressive hikes that will take its policy rate to restrictive levels by the fall, wrote RBC assistant chief economist Robert Hogue in a report. “This will send more buyers to the sidelines, especially in British Columbia and Ontario where affordability is extremely stretched,” he said.
RBC now expects home sales to fall nearly 23% in 2022 and 15% in 2023, with national benchmark prices to drop more than 12% from peak to trough by the second quarter of 2023.
The 42% drop in home sales from the peak in early 2021 will exceed the declines seen in the past four national downturns, Hogue said. In 1981-82 and again in 1989-1990 sales fell 33%; they fell 38% in 2008-09 and 20% in 2016-2018. The 12% decline in prices by early 2023 will be the steepest correction in the past five housing downturns, he said.
The housing correction first began to take hold when the Bank started to hike rates in March, but the 100-basis point-rise on July 13 — an increase that brought variable rates within sight of fixed rates — will speed the cooling, Hogue said. RBC expects the Bank’s policy rate to reach 3.25% by October — “a big bite for borrowers to swallow that will spoil or delay homeownership plans for many buyers.”
The most expensive provinces, Ontario and B.C., will be the epicentre of the correction, says Hogue. RBC sees home resales in British Columbia and Ontario falling 45% and 38% in 2022 and 2023, respectively, and prices falling more than 14% from quarterly peak to trough. The downturn will rival the decline Ontario saw in the early 1990s when sales fell 41% and prices 15%, but it’s not as bad as what B.C. went through in the early 1980s when sales fell 62% and prices 27%, said Hogue.
More affordable areas of the country should fare better. While sales are expected to fall more than 20% from record levels in every other province than Ontario and B.C., prices may prove more resilient. RBC expects prices to fall less than 3% in Alberta and Saskatchewan and between 5% and 8% in most of the other provinces by the first half of 2023.
In Quebec, RBC sees home sales falling 16.8% by the end of 2022 and down 6.1% in 2023. Prices are expected to end 2022 7.5% higher than the year before and but then decline 5.1% in 2023.
But while RBC economists are predicting a “historic correction,” they do not see a collapse in the housing market. Rather, they argue that this downturn should be seen as a “welcome cooldown” after the two-year buying frenzy that put homeownership out of reach for many Canadians.
RBC expects the correction to wind up in the first half of 2023, though a steeper and longer downturn can’t be ruled out. “Solid demographic fundamentals (including soaring immigration) and a low likelihood of overbuilding should keep the market from entering a death spiral,” wrote Hogue.
New Home and Condo Sales Plummet Despite Rising Prices
Prices of new homes and condominiums in the GTA continue to rise even as sales plummet, according to a new report, prompting concerns development may start to slow under waning demand. The report, from the Building Industry and Land Development Association, compared sale figures from June 2022 with those from June 2021.
It found total new home sales fell 56%. New condo sales were down 44%. The most staggering drop was in single family home sales — 85% below 2021 and 85% below the 10-year average. In the meantime, new condo prices rose 12.4% and single family home prices were up 31.2% from June 2021.
David Wilkes, president and CEO of BILD, says slowing demand can be directly traced to rising interest rates. Prices rising reflect increasing costs for materials and labour, as well as fees and taxes.
This is pitted against Ontario’s issue of housing undersupply. Earlier this year, a provincial task force recommended Ontario set a goal of 1.5 million new homes built in the next 10 years. “We need to focus on long-term supply challenges,” Wilkes said. “Inventory remains historically low — we need to continue to address shortage in supply.”
With demand faltering under rising costs, building output may fall. This could hamper efforts to restore housing affordability. A report from Canada Mortgage and Housing Corp. found Ontario may need as many as 1.85 million new homes to push affordability back up to a level where the cost of an average home could be covered by 40% of the average household’s income.
“I think builders will respond to changes in the market,” Wilkes said. “It doesn’t make economic sense for builders to continue to build at the pace that is necessary. I worry this could be a consequence that will exacerbate the longer-term challenges we have.”
The solution, Wilkes said, is more comprehensive use of available land, a faster development approval system and “fairer” taxes. “We really need a new focus, new discipline, new rigour around getting (development) approvals through municipalities,” he said. “Right now, it takes 10 to 11 years for a development project from start to finish. A large part of that is the delay in approvals.
Wilkes is also a proponent of adjusting zoning in the GTA to identify land near the urban boundary that can be used for additional housing. As well, he said government fees on development need to be more equitable, that new growth “pays for its share of infrastructure, but not a disproportionate share.”
To Wilkes, falling sales should not obfuscate the necessity for more development. “We need to take bold action — we can’t take our eye off the ball focusing on one month of trends where we see sales declining due to external factors,” he said. “We simply don’t have enough supply to meet our long-term demand.”
Source: The Star
CMHC Says Annual Pace of Housing Starts Slowed in June Compared With May
Canada Mortgage and Housing Corp. says the annual pace of housing starts in June slowed compared with May. The national housing agency says the seasonally adjusted annual rate of housing starts came in at 273,841 units for June, down 3% from 282,188 in May.
The drop came as the annual rate of urban starts fell 3% to 257,438 units in June. The annual pace of urban starts of apartments, condos and other types of multi-unit housing projects dropped 2% to 197,022 units, while the rate of single-detached urban starts decreased 4% to 60,416 units. Rural starts were estimated at a seasonally adjusted annual rate of 16,403 units.
The six-month moving average of the monthly seasonally adjusted annual rate of housing starts was 258,295 in June, up from 252,444 in May. “The monthly SAAR was lower in June compared to May; however, the level of housing starts activity in Canada remains historically high and well above 200,000 units since 2020,” said Bob Dugan, CMHC’s Chief Economist. “The decrease in monthly SAAR housing starts in Canada’s urban areas was driven by lower single-detached starts in June. Vancouver, Toronto and Montreal all recorded higher total SAAR starts, driven by higher multi-unit starts except for Montreal where single-detached starts posted a higher increase.”
June Home Sales Down 24% From Last Year, 6% Since May
The national real estate market’s cooling continued with home sales falling again in June, but the Canadian Real Estate Association said the decreases are smaller than those seen in previous months. The association shared that June home sales amounted to 48,176, a 24% drop from 63,280 during June 2021. On a seasonally adjusted basis, sales were down almost 6% from May.
The association attributed the drops, which were not as large as those seen in April and May, to financial pressures prospective buyers have experienced as the Bank of Canada has continued to hike its key interest rate.
The central bank increased its key interest rate on July 13 to 2.5%, but CREA said the rate’s previous increases were already transforming the market last month. “Sales activity continues to slow in the face of rising interest rates and uncertainty,” said Jill Oudil, CREA’s chair, in a news release. “The cost of borrowing has overtaken supply as the dominant factor affecting housing markets at the moment, but the supply issue has not gone away.“
Oudil’s observations mirror what real estate agents have been reporting for months: the market is cooling. In typically heated markets like the Greater Toronto and Greater Vancouver Areas, they have noticed homes sitting for sale for far longer than they would have last year or at the start of 2022, when the pace of sales was torrid. Buyers are now waiting on the sidelines to see just how much purchasing power they could lose as rates climb, but have also put off making offers because forecasts have lead them to believe prices will drop even further.
In June, CREA predicted the national average home price will rise by 10.8% on an annual basis to $762,386 in 2022. It forecast the largest price gains for Maritime provinces, followed by Ontario and Quebec. The national average home price in June fell 2% from June 2021 to $665,849 and, on a seasonally adjusted basis, was down 4% from May.
The lower prices mean it’s the buyer’s “time to shine,” said Wins Lai, a Toronto broker. Even though rates are up, she said it’s a particularly good time for first-time homebuyers to get into the market because prices aren’t as high as they previously were and listings are up. The association found new listings climbed by 4% month-over-month and 10% year-over-year.
Much of the frenzy has dissipated too. “Most of my colleagues that are trying bidding wars … they only got one offer because the amount of buyers has definitely slimmed down,” she said. “They look at the rates and they look at their investment and they say, ‘hey, does this make sense?’”
Most of June’s declines in price came from Ontario, but CREA also detected an easing in B.C. and prices tend to be “more or less flat” in the Prairies. Quebec is showing small signs of declines and on the East Coast, prices are continuing to rise but have stalled in Halifax-Dartmouth, CREA said.
Robert Kavcic, an economist at Bank of Montreal, called the latest data the “early days of correction” in a note to clients. “Sales have now fallen back into pre-COVID ranges and below the 10-year average for the first time since the pandemic broke out,” Kavcic wrote in a note to clients. “The period of extreme excess demand is essentially over, and we are on track for a very weak year ahead for resale volumes and prices.”
Deeper Correction Possible as Rate Hike ‘Takes a Hammer to Housing
The Bank of Canada’s 100-basis-point hike was like taking a “hammer” to the housing market, setting it up for an even deeper correction next year, says a BMO senior economist. “The fact that the market had already cracked after the BoC’s initial move in rates only reinforced how sentiment-driven the market was, and how quickly that can change,” BMO’s Robert Kavcic said in a recent note.
The abrupt shift in sentiment was apparent even before the Bank’s supersized hike on July 13 with a survey done the week before revealing that more Canadians now expect lower home prices ahead rather than higher, said Kavcic. The Nanos survey found that just 30% now expect higher prices, down from almost 70% at the height of the pandemic housing boom.
“We’ve argued all along that there was a major behavioural aspect to what was happening in Canadian housing, where acute price gains were driven by FOMO, speculation and investment activity,” wrote Kavcic. “Indeed, the proof is that even just an initial nudge in interest rates was enough to crack expectations and trigger a correction. The latest move by the Bank of Canada will wash away any remaining froth.”
Borrowing costs have gone from 1.5% at the start of the year to about 4.5% in a matter of six months which is a “massive pill for the market to swallow,” said Kavcic.
Qualifying rates are also rising. The stress test, the higher of 5.25% or 200 bps above the contract rate, has now risen to 6% for variable rate mortgages and 7% for fixed. “So, unlike previous rounds of tightening, this move now also begins to carve into purchasing power on paper,” he said.
The swift rise in interest rates and weakening economic outlook has prompted other economists to downgrade their forecasts for Canada’s housing market.
Oxford Economics — already on the bearish end of the spectrum with their earlier forecast of a 24% home price correction — now see a larger 27% peak-to-trough drop in prices by the first quarter of 2024.
Sadly, falling prices are not expected to make Canadian housing more affordable any time soon. The reading on Oxford’s home affordability index in the first quarter of 2022 showed the typical home price was 51% above the borrowing capacity of median-income households — a record for the index that dates back to 2005.
“Now rising interest rates are creating a new headwind for households, driving affordability further into unprecedented territory,” said Oxford. It expects the home price to rise to 72% above the median borrowing capacity by the third quarter as higher mortgage rates offset lower home prices.
The good news is that affordability should start to improve as mortgage rates peak late in 2022, Oxford said.
Source: Financial Post
Toronto New Home Construction Jumped Again in June — but Economists See a Slowdown Coming Soon
The breakneck pace of new home construction in the Toronto area continued in June, according to new data from the Canada Mortgage and Housing Corporation. But that could soon be coming to an end, according to some economists.
“Long-term, I think the home construction market is going to remain strong, but the next six to 18 months, there will be some weakness. We’re not going to see numbers like this continue,” said economist Mike P. Moffatt, an assistant professor at Western University’s Ivey School of Business.
The CMHC said new housing starts in the Toronto area hit 49,860 in June, a 27% rise from May’s 39,381. Across the country, there are already signs of a housing construction slowdown. Nationally, there were 273,841 housing starts in June, a 3% drop from May’s 282,188.
Rising interest rates, prompted by the Bank of Canada’s efforts to slow down runaway inflation, will likely prove to be a double-whammy for homebuilders, Moffatt argued. “Not only are their financing costs for projects going up, there’s also lower demand from consumers,” said Moffatt. “It will be interesting to see what happens in the fall.”
The Bank of Canada shocked observers by hiking its key overnight lending rate a full percentage point to 2.5%. The Bank of Canada also hinted it would need to raise rates again before the year is out.
BMO senior economist Robert Kavcic agreed that there could well be a slowdown in construction, prompted partly by rate hikes, but also by falling prices for resale homes. “The interesting part will be how construction responds to higher interest rates, compressed margins and a clear sharp pullback in resale demand. We could very well start to see some project cancellations and a pullback in activity through next year,” Kavcic said in a research notelooking at the CMHC data.
But, he added, there’s no immediate sign that the slowdown in resale housing prices is moving to new-builds. “All in, unlike the resale market, new building activity is running strong — but this segment of the market lags, so any cracks wouldn’t realistically begin to show in the data until later in the year,” Kavcic said.
On July 17, Kavcic said the Bank of Canada rate hike is “hammering” the resale market. “The Bank of Canada’s 100 bp rate hike sets us up for an even deeper correction in housing through . The fact that the market had already cracked after the BoC’s initial move in rates only reinforced how sentiment-driven the market was, and how quickly that can change,” Kavcic said.
The lag between the resale market and new home construction is particularly keen in multiple unit buildings such as condos, where builders typically only go forward with construction once the majority of units are paid for, according to Chris Zakher of the CMHC. “A lot of this was sold pre-construction, so this really reflects demand and sales from two or three years ago,” said Zakher, Toronto market analyst at the CMHC. “This is a lagging indicator.”
Still, even if new home construction dips, there will still be plenty of demand in the long run, argues Phil Soper, CEO of real estate giant Royal Lepage. Immigration is starting to bounce back to pre-pandemic levels, Soper said. And so are the numbers of international students attending Canadian universities. Both, Soper said, drive demand for condos, in particular. So, too, does the fact that many office buildings are gradually reopening; people who ditched their downtown condos and bought a house with a yard in a smaller city during the pandemic are starting to come back.
“People are coming back to offices, even if it’s two days a week,” said Soper. “And they’re finding it difficult to live in St. John if they’ve got to be in Toronto two days a week.”
Source: The Star
Bank of Canada’s Interest Rate Hike to Further Slow Housing Market
The Bank of Canada’s interest rate increase is expected to deepen the chill in the country’s housing market and reinforce the view that property values will decline.
Home resales and prices have been tumbling since the central bank embarked on a series of rate increases as it seeks to arrest inflation. On July 13, the Bank of Canada announced an increase of a full percentage point pushing its benchmark interest rate to 2.5% from 1.5%. It is the fourth consecutive interest rate increase since March, and the first time the bank has raised its rate by a full point since 1998.
The central bank said that unsustainably high housing prices have contributed to excess demand in the country’s economy and warned interest rates would have to rise further to cool demand and lower inflation. “Our goal is to get that demand down and part of restoring the balance of supply and demand in the Canadian economy is restoring that balance in the housing market and that’s what we’re aiming to do,” Bank of Canada senior deputy governor Carolyn Rogers told reporters at a news conference, adding that the bank expects “changes in housing activity and prices will feed through to overall economic activity.”
The higher rates will continue to increase borrowing costs, making it harder for prospective homebuyers to qualify for a mortgage and reducing the size of their loan. Borrowing costs have already doubled over the past year, after plummeting to record lows during the COVID-19 pandemic. By late afternoon on July 13, most major lenders said their prime lending rate would increase by one full percentage point to 4.7% on July 14.
Robert Kavcic, senior economist with Bank of Montreal, said the large interest rate increase “will cast an even deeper chill on the market through the fall, and reinforce the change in market psychology.” He said: “Expectations of price declines are on the rise. This … rate hike will reinforce that shift.”
Home prices have already dropped by double-digit percentages in some parts of the country, including the Toronto suburbs, which was one of the frothiest markets during the first two years of the pandemic. Home resales are well below prepandemic levels in places such as Vancouver, and the average home price across the country is trending lower.
Private-sector economists are forecasting home price declines of up to 20% from peak prices in the first quarter of 2022 through early 2023. A correction of that magnitude, however, would not bring prices back down to prepandemic levels. The typical home price across the country is at least 40% higher than two years ago.
Nevertheless, the supersized interest rate increase caught the real estate industry off guard. “This was a total shock and completely unexpected,” said Samantha Brookes, the chief executive of brokerage firm Mortgages of Canada. “It’s going to have a huge effect on people.” Ms. Brookes said some of her clients had said before this latest increase they were unable to afford higher mortgage payments.
Ms. Rogers said the bank was cognizant of the fact that some homebuyers, especially those who bought during the frenzy, might have “stretched to do so…. There’s no doubt they’re being squeezed,” said Ms. Rogers. Though she added that those variable-rate mortgage holders represent a small segment of the population.
Would-be buyers are now qualifying for smaller loans, cutting them out of the priciest markets, such as Southern Ontario, and reducing competition for real estate. At the same time, federal rules have made it harder for borrowers to qualify for a loan from banks – which typically offer the cheapest mortgages.
Federal rules require borrowers to prove they can make their mortgage payments at an interest rate at least two percentage points above their actual mortgage rate. With interest rates on five-year fixed rate mortgages near 5%, that means borrowers have to prove they can make their mortgage payments with an interest rate near 7%.
Canada’s housing agency, Canada Mortgage and Housing Corp., recently cut its home price forecast, saying interest rates were rising faster than anticipated. The new forecast is for a mild price correction and the agency’s chief economist said he had a hard time believing home prices would plunge, given the imbalance between housing supply and demand.
Source: Globe and Mail