CREA Downgrades Sales Forecast for This Year and Next as Interest Rates Weigh on Buyers
The Canadian Real Estate Association has lowered its forecast for home sales in 2023 after a market rebound this spring eased in June, when the Bank of Canada resumed raising interest rates.
As CREA expected, national home sales came flying out of the gates in April 2023. Buyers who had been sitting on the fence responded to the twin signals of interest rates looking like they were at a top and property values hitting bottom.
With the Bank of Canada unexpectedly ending its pause on rate hikes in June and hiking again in July, a major source of uncertainty has returned to the housing market.
That said, even before the resumption of rate hikes, the recent sales rally had already shown signs of losing steam. The biggest month-over-month increase in sales activity was back in April, followed by an increase only half as big in May, then by a small 1.5% gain in June. This was likely because new listings had fallen to a 20-year low, which was reflected in month-over-month price gains in April, May, and June that were only bested by those seen during the COVID-19 pandemic.
New listings are now catching up to sales, although this isn’t expected to translate into further big gains in activity as some buyers will likely be moving back to the sidelines, as they did in 2022, to wait for additional signals from the Bank of Canada and the data it bases policy on. Looking further out, there’s also a growing consensus that rates will not just be higher, but likely for longer – well into 2024.
As a result, CREA has downgraded its forecast for home sales in 2023 and 2024 compared to its April 2023 outlook, along with the trajectory for prices. That’s not to say either are necessarily expected to return to declines on a month-to-month basis, but rather to stabilize or rise at a slower pace than they have in recent months.
Some 464,239 properties are forecast to trade hands via Canadian MLS® Systems in 2023, a 6.8% decline from 2022. This was a broadly based downgrade from CREA’s previous two national forecasts, as the sales rebound in most parts of the country, already hampered by a lack of supply, is expected to be cut short by recent increases in borrowing costs and the uncertainty those summer rate hikes will create going forward into the fall.
The national average home price is forecast to edge down just 0.2% on an annual basis to $702,409 in 2023. This is up from CREA’s previous forecast, owing both to compositional gains from additional sales in the pricey regions of British Columbia’s Lower Mainland and the Greater Toronto Area, plus stronger than expected price growth across the country in the second quarter of 2023. That said, while the annual forecast figure has been raised, the trajectory for prices going forward from here is expected to be less steep.
National home sales are forecast to rebound by 11.2% to 516,072 units in 2024 as housing markets steadily return towards trend, and monetary policy starts to move back in the direction of a more neutral stance. This forecast would place activity in line with its 10-year average, below 2007, 2016, 2020, and 2021.
The national average home price is forecast to rise a further 3% from 2023 to 2024 to around $723,250. This is only close to where it was in the second quarter of 2023. So the forecast, in general, is for prices to mostly stabilize until interest rates start to come down.
June Home Sales Show Signs of Stabilizing
The number of home resales rose just 1.5 per cent in June over the previous month after removing seasonal influences, according to CREA, much less than the 5.1-per-cent gain posted in May.
Still, June marked the fifth straight month of sales increases. Activity climbed in British Columbia and Alberta, offsetting a plunge in sales in the Toronto region, the country’s largest real estate market.
The actual (not seasonally adjusted) number of transactions in June 2023 came in 4.7% above June 2022. This was the largest year-over-year national sales increase in two years.
“Housing markets appear to be stabilizing heading into the summer following some big ups and downs over the last year,” said Larry Cerqua, Chair of CREA. “Most importantly, the recovery in new listings over the last few months will give buyers more choice and should help to slow price growth over the second half of the year.” continued Cerqua.
“With sales levelling off near historically average levels and new listings finally starting to play catch up, housing markets appear to be settling down,” said Shaun Cathcart, CREA’s Senior Economist. “History suggests the price side of things will respond to this with only a slight lag. Add to that the recent Bank of Canada rate hikes, and we can probably expect price growth to moderate in the months ahead, likely still with some degree of upward pressure, but less than in the last three months.”
The number of newly listed homes was up 5.9% on a month-over-month basis in June. Building on gains of 3.1% in April and 7.6% in May, new listings have gone from a 20-year low in March to closer to (but still below) average heading into the summer.
With new listings outperforming sales in June, the sales-to-new listings ratio eased to 63.6% compared to 66.4% in May and a recent peak of 68.3% in April. That said, the measure remains well above the long-term average for the measure of 55.2%.
There were 3.1 months of inventory on a national basis at the end of June 2023, unchanged from the end of May and down more than a full month from the most recent peak at the end of January. The long-term average for this measure is about five months.
The Aggregate Composite MLS® Home Price Index (HPI) climbed 2% on a month-over-month basis in June 2023—a large increase for a single month on the heels of similar gains in April and May. It was also once again very broadly based, with a monthly increase in prices between May and June observed in most local markets. The Aggregate Composite MLS® HPI now sits 4.5% below year-ago levels, the smallest decline since November 2022.
The actual (not seasonally adjusted) national average home price was $709,218 in June 2023, up 6.7% from June 2022. The national average price is heavily impacted by the GTA and British Columbia’s Lower Mainland. Excluding the GTA and Greater Vancouver from the calculation cuts more than $130,000 from the national average price.
Rate of Housing Starts in Canada Posts Largest Month-to-Month Increase in a Decade
Canada’s housing agency says the annual pace of housing starts in June posted its largest month-over-month increase in a decade to slightly reverse a downward trend seen in recent months. Canada Mortgage and Housing Corp. says the seasonally adjusted annual rate of housing starts in Canada totalled 281,373 units in June, up from 200,018 in May as there was a spike in activity in the more volatile mutli-unit category.
The rate of multi-unit urban starts rose 59% to 219,914, while the rate of starts for single-detached urban homes increased 3% to 42,901.
Toronto and Vancouver led the way in construction, making up 47% of total starts, as their actual year-to-date starts were 32% and 49% higher respectively than the same period in 2022.
Looking at the longer-term trend across the country, represented by the six-month moving average of the seasonally adjusted annual rate, shows 234,974 units in June, up 2.4% from May.
The uptick reverses a steady downward slide that started in November as rising interest rates made it harder to build, but not enough to shake the long-term trend, the agency said. “Housing starts for the first half of the year were 8% lower than they were over the same period in 2022 as the high interest rate environment continues to challenge housing starts through increasing borrowing costs,” said CHMC chief economist Bob Dugan in a statement.
The decline in housing starts from 2022 comes despite a CMHC projection that Canada needs significantly ramp up supply to tackle the housing crisis. It projected in June 2022 that, based on the rate of construction at the time, the country would need to build an additional 3.5 million units of housing by 2030 on top of what was already expected to restore affordability.
TD economist Marc Ercolao said that the while the June jump was impressive, the six-month moving average continued to fall slightly. “One month is not enough to turn around the long-running downward trend in the sector,” he said in a note.
Slowing home sales continued to feed into falling construction activity, which, despite a second-quarter pop, are expected to trend lower going forward, said Ercolao. “This burst should be short-lived and, as high interest rates continue to work through the economy, homebuilding will be a drag on residential investment in the coming quarters.”
Source: The Star
B.C. Home Builders Say Construction Costs and High Interest Rates Are Hobbling Them
While rents in many B.C. cities are soaring higher every month and house prices continue to rise, the number of homes being built is declining, with home builders saying that interest rates and prohibitive land and construction costs continue to hobble them.
Housing starts and new-home registrations are down this year, and the number of building permits in some high-growth cities has fallen noticeably from 2022.
Vancouver, which issued about 2,600 building permits from January to May last year, issued just 2,100 in the same period this year. In Surrey, about 220 fewer permits were issued, a year-over-year drop of 10%. In contrast, Burnaby and Coquitlam have seen increases or no decline. Both are suburbs that were primarily single-family bedroom communities until the past decade, when their local councils began encouraging density in certain areas and approving some of the region’s tallest towers.
On the whole, however, B.C. and national statistics show that the later stages of home building – permits, completions, new-home registrations – are down in many places, even though municipalities may have approved a number of new homes in the past couple of years.
The effects may not be visible now, a University of British Columbia economist says, because builders are still going ahead with projects started earlier. But the shortage will become evident in the coming years as many developers hit the pause button. “Waiting is pretty attractive right now,” Tom Davidoff said. “So a couple of years down the road, you will see a dip in new supply coming on.”
Developers and senior city managers say it’s clear that high interest rates, along with land, labour and material costs are making rental projects particularly unworkable. “There must be close to hundreds of projects that are effectively on hold in the region,” said Jon Stovell, the chief executive officer of development company Reliance Properties Ltd. and a board member of the Urban Development Institute. “Everyone is waiting for construction costs to come down. But, in the meantime, I think we will see continued rapid contraction of supply” – even though demand for rentals in the Vancouver region is, as he put it, “unhinged.”
That’s because the rents that even the most optimistic developers forecast won’t cover current costs. Mr. Stovell said construction costs have increased more than 50% since mid-2020.
Ron Rapp, the CEO of HAVAN, Homebuilders Association Vancouver, says he is also seeing pauses on approved projects. “The projects that were more viable two or three years ago, the new environment may not be sustainable for them,” he said.
New-home registrations this year in B.C. are 23% lower year-over-year, according to statistics to the end of June collected by BC Housing. In terms of multiunit buildings, only 10,800 new homes were registered in the first half of the year, compared with 17,500 for the same period in 2022. The slowdown has become evident in cities such as Vancouver and Surrey, where multiunit projects account for a large proportion of new building.
“Because our development is increasingly in large multifamily projects, these numbers can change very quickly when a small number of large projects receive permits,” said Surrey’s manager of planning and development, Don Luymes. “But I would suggest that the higher-interest environment, plus the increasing cost of construction and labour, are having a noticeable effect on construction.”
Building-permit values were down 16% year-over-year for the province from January through April. In Vancouver, values for January to May this year were only $834-million for residential projects, compared with $1.3-billion for the same five months in 2022, according to city reports.
Vancouver’s general manager of buildings and licensing, Andrea Law, said some builders are waiting for the city’s proposed new housing strategy – allowing four, five and sixplexes on former single-family properties, depending on lot size – so they can apply for denser projects. Ms. Law, too, said she is generally hearing from building-permit applicants that interest rates, problems with the supply chain and labour costs are the biggest problems.
Coquitlam’s director of planning, Andrew Merrill, said the city is still seeing a high volume of building-permit applications. Burnaby has seen building-permit values soar in recent years, with multifamily permit values more than doubling in four years. It has $784-million in building permits for the first five months of 2023, compared with $775-million for the same period last year.
Source: Globe and Mail