Quiet fall housing market across Canada

Unsurprisingly, soaring interest rates are keeping the temperature significantly down for Canada’s housing markets this fall. Activity remains well below pre-pandemic levels in most markets and prices are softening further from peaks reached earlier this year. There were some interesting nuances emerging from the latest local real estate board reports though. The slide in activity may be stabilizing in Toronto (and perhaps Calgary and Edmonton) whereas it was still full-on in Montreal (and Ottawa to a lesser extent) as of October. We’re not convinced a sales uptick last month in Vancouver marked a turning point but it could signal a slowing in the pace of correction. Declining price trends appear to be broadly moderating with all major markets reporting smaller rate of depreciation in October.

Whether activity is stabilizing, will soon stabilize or slump further, our view is the market will stay generally soft over the coming months. The massive interest rate increases to date and a further 25 basis-point hike expected from the Bank of Canada by year-end will continue to significantly challenge buyers. Poor affordability poses a huge obstacle in many markets that only lower prices can ease in a meaningful way. We expect prices will keep falling until a bottom next spring. Our forecast calls for the national benchmark price to drop 14% from (quarterly) peak to trough.

Toronto area—Market correction tapers off

The last four months have been very quiet but the sharp declining trend seems to be stabilizing. Home resales were essentially flat between September and October on a seasonally-adjusted basis (edging up just 0.2%) and little changed from July at 62,000 units (annualized). Rising interest rates are clearly keeping demand cool at this stage. Yet they aren’t heating up supply either. So far there’s no indications higher rates are triggering any distressed selling wave. Demand-supply conditions appear to be levelling off following this spring’s sharp deterioration. Property values are still falling though the pace is starting to ease. The composite MLS HPI declined for the seventh straight time by 1.1% m/m in October, which is less than a third the 3.4% average rate of decline between April and August. The index is now off 18% (or $237,000) since the March peak, reversing almost half the $504,000 increase earlier in the pandemic. October marked the first time the index slipped below the year-ago level (by 1.3%) in more than three years. The single family detached segment (down 3.7% y/y) accounted for most of the depreciation. Condo prices are holding up better, their index remaining 7.5% above where it was a year ago. We expect these diverging trends to persist in the near term.

Montreal area—Controlled softening ongoing

The downturn isn’t letting up. At this stage, more buyers are moving to the sidelines, inventories keep rising and prices keep drifting lower. But the situation is far from dire. Demand-supply conditions are reasonably balanced and, despite rising, inventories remain historically low. Depending on the measure and part of the area being looked at, prices are either up slightly from a year ago or on par. In any case, they’re still significantly above—nearly 40%—pre-pandemic levels. We see this controlled softening in the market persisting in the near term as rising interest rates take a further toll on buyers. Home resales are poised to stay weak. Our estimated 2.6% m/m drop in October may signal a slowing in the pace of decline though. This is down from an average of -7% in the previous three months. And with activity now at a seven-year low (excluding the spring 2020 lockdown period) we think there bottom could be in sight (early-2023).

Vancouver area—Challenging times

These are especially challenging times for buyers in the area. Rising interest rates have walloped affordability, cooling demand by several degrees. The Bank of Canada’s hiking campaign triggered a sharp 44% drop in activity since March, swiftly rebalancing what were previously super-tight demand-supply conditions. We estimate home resales rose more than 10% m/m in October though this is unlikely to mark a turning point. We expect activity to stay soft for a while longer given the intense unaffordability pressures. Property values have fallen 9.2% since the April peak, including a 0.6% m/m drop in October (based on the MLS HPI). We see prices continuing to slide in the near term though at a moderating rate. October’s drop was the smallest in five months, which points in that direction.

Calgary—Canada’s outlier?

Calgary continues to buck the trend in many respects, being among the few markets still operating well above pre-pandemic activity levels. We estimate home resales even increased by slightly less than 5% m/m in October. Despite a rising trend in inventories, demand-supply conditions remain generally tight. This hasn’t stopped prices from declining—the MLS HPI is off 4.2% since the peak in May—but has contained the correction compared to what we’ve seen in most major markets. Calgary homebuyers haven’t been immune to the loss of purchasing power arising from higher interest rates. We expect this will continue to maintain downward pressure on prices in the near term. That said, we think Calgary property values might be quicker to recover than most other markets. Tight demand-supply conditions are bound to become the dominant force driving prices once interest rate stabilize. Rebounding in-migration is also likely to set a supportive backdrop for the market.

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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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