The picture is becoming more complex for Canada’s housing market. Local real estate boards reported varying results in March that may signal a break from the uncharacteristically synchronized trends seen during the pandemic. Some markets—including Calgary, Edmonton, Ottawa and Hamilton—continued to post very (and in some cases, extremely) strong activity while others—including Montreal and Toronto—experienced some moderation. Historically-low inventories remain a constant nationwide as are rising prices. But there are signs tight demand-supply conditions are easing in Toronto and Montreal, and we expect the market rebalancing process to gradually spread to other markets in the period ahead. Buyers are already seriously challenged by poor affordability in large markets and the situation will get worse as interest rates rise further.

Last month’s first rate hike from the Bank of Canada since 2018 likely had little cooling effect on the market. If anything, it might have heated up demand somewhat as some buyers advanced purchasing decisions to lock-in lower rates. We believe it will be a different story for upcoming rate hikes—we expect our central bank to raise its policy rate by a further 150 basis points by year-end. Activity brought forward since the fall has exhausted some of the future demand, but more importantly materially higher borrowing costs will make it harder for buyers to enter the market. In our latest Housing Trends and Affordability report, we warned that affordability is at risk of spiralling to worst-ever levels in Canada.

Toronto area—Near a peak?

Spring activity is starting on a quieter note this year. Home resales were down 30% in March from a year ago and off an estimated 16% from February (on a seasonally-adjusted basis). Scarce inventories are still an issue but the tightness between demand and supply is easing at last. It looks like rapidly worsening affordability might be (finally) taking a toll on demand. For now, home prices are still under significant upward pressure though the pace slowed in March. The composite MLS HPI rose 2.7% from February, marking a shift down from the average 4.4% gain in the previous five months. Relative to a year ago the price index’s increase moderated slightly to 34.8% from 35.9% in February. While property values may well climb further in the coming months, we expect the pace to moderate—possibly significantly if deteriorating affordability sends more buyers to the sidelines. In fact, we think a peak may soon form. Clearly the $1.38 million price tag for a typical home is a stretch for a growing number of buyers. More of them gravitated toward the least expensive options (e.g. condos) in March, causing the average price of homes sold to fall 2.6% from February.

Montreal area—Buyer enthusiasm may be waning

The moderating trend continued last month. We estimate resales fell 4% from February (seasonally adjusted), which would make it the fifth-straight monthly decline. Historically-low inventories have been a significant drag on activity since last year as buyers scrambled to find properties meeting their needs. But we believe rising ownership costs are increasingly tamping down buyers’ enthusiasm. The impact on prices to date has been limited—property values keep going up at rapid clip. Yet we detect subtle signs of moderation on that front as well. Median prices have grown more slowly in recent months, including March. This is especially the case for the more expensive single detached homes. We expect an easing of demand-supply tightness will further rein in price gains in the period ahead. A notable (estimated) drop in the sales-to-new listings ratio in March may be an early sign the market is on its way to a healthier balance.

Vancouver area—Still going strong… for now

Buyers haven’t quit yet. They made more deals in March than in February—we estimate resales went up 4% m/m (seasonally adjusted)—despite fewer homes put up for sale. Strong buyer competition took prices higher to a record $1.36 million (MLS HPI benchmark), up a solid 3.6% from February and 20.7% from a year ago. Odds are they’ll rise further in the near term. Sellers are still comfortably in the driver’s seat while inventories remain scarce. The drop in new listings tightened demand-supply conditions even more in March. Nonetheless, we expect activity to cool later this year. Buyers will find it increasingly difficult to cope with growing affordability strains arising from sky-high prices and rising interest rates. This will eventually rebalance the market and stabilize prices. We believe affordability issues will drive buyers toward less expensive options such as condos and properties outside the urban core, including smaller markets in the province.

Calgary—Firing on all cylinders

The market keeps getting hotter and hotter. Home resales were incredibly strong again in March, after reaching an all-time high in February (seasonally adjusted). While supply picked up significantly in the past two months—new listings were up a solid 24% from a year ago in March—it just wasn’t enough to keep up with soaring demand. So upward price pressure continues to build. The composite MLS HPI jumped 4% m/m in March, down just modestly from an outsized 5.5% gain in February. Strong successive gains in the last three months have pushed the index up nearly 18% from a year ago—the biggest annual increase since 2007. With the provincial economy now roaring, in-migration rapidly gathering steam and affordability comparing well relative to other major markets, we expect housing demand to stay solid in the period ahead. This is poised to keep prices on a steep upward trajectory.

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Robert Hogue is responsible for providing analysis and forecasts on the Canadian housing market and provincial economies. Robert holds a Master’s degree in economics from Queen’s University and a Bachelor’s degree from Université de Montréal. He joined RBC in 2008.

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