Canada

Canada’s Property Bubble Saw Inventory Tighten. It Did That Last Time Prices Fell Too

Canadian real estate inventory suddenly became a little more scarce last month. An uptick in the sales to new listings ratio (SNLR) has agents saying a second wave of growth is coming. It’s true an increase in the ratio tends to be positive for price growth, but a single uptick isn’t the same. When the ratio drops from such high levels, it tends to not occur in a straight line. In fact, we’ve seen this before. Currently, the cooling trend is still intact, and price growth is still decelerating. 

Sales To New Listings Ratio (SNLR)

The sales to new listings ratio (SNLR) compares home sales to inventory. It gives a read on absorption, helping to give a picture of the inflow of inventory. Lower readings mean inventory is building faster. When this occurs consistently, it applies more pressure for home prices to fall. Higher readings do the opposite, with less inventory building, it means a tighter market. This is when prices tend to rise, as scarcity becomes more apparent.

This is a fundamental indicator, but reading it is a little tricky when buyers are exuberant. In an exuberant market, buyers aren’t using fundamentals — they’re using emotion. In this case a fundamental indicator tends to become a sentiment indicator. When looking at those, hard values are less important than the trend and velocity.

Earlier this year, we took a peak at the relationship between the SNLR and price growth. Since 2005, annual price growth has peaked between 2 and 6 months after the SNLR. If historic patterns held, that meant price growth would peak between March and July. We know, it’s a little surprising to see a forecast work out, but that’s what just happened. 

Canadian Home Price Growth Peaked In June, Decelerated In July

Last month’s national home price data confirmed growth peaked in June. The annual rate of growth fell to 22.2% in July, down from a record 24.2% the month before. That’s just a little more than the interest paid on a new conventional mortgage at these prices. 

Over the past year, prices have increased substantially. A slowdown isn’t that surprising, but it removes the urgency to buy. If you’re seeing home prices rise $40,000 per month, you’ll want to pull the trigger immediately. When they’re rising just a little less than your rent cheque, you might take a little longer to buy. We’ve seen this in markets like Toronto, where condo prices made a monthly decline in July. This happened despite tightening inventory.

It’s a vicious cycle of expectations. Soaring prices lead people to bid up offers even further. This leads to even more people jumping into the market, pushing home prices even higher. Slowing price growth causes people to pause, and take a little more time when buying. This causes other people to take their time buying, causing an even bigger slowdown.

It’s a market behavior that’s commonly seen with assets, and commodities. Inflation theory is the most common place it’s discussed. Rising inflation causes people to buy sooner, to avoid future price increases. Falling inflation leads people to delay purchasing, to see if they can get a better deal. The latter often sends people into a Tiff, leading to the adoption of higher and more toxic inflation.

Canadian Real Estate Inventory Tightened. Doesn’t That Mean The Trend Is Reversing?

The SNLR increased last month at the national level, showing tighter inventory. The ratio hit a seasonally adjusted 74% in July, up from the 69.4% reported in the prior month. It triggered a number of people to claim the trend of cooling is broken, and won’t continue. 

Canadian New Inventory Flow To Price Growth

The sales to new listings ratio (SNLR) compared to the annual rate of benchmark price growth, for composite homes across Canada.

Source: CREA; Better Dwelling.

Trends don’t move in straight lines, they tend to zig zag in a general direction. This is still almost 20 points lower than the peak market frenzy for inventory. It’s a huge change in sentiment for various levels of buyers. Buyers that have been browsing since January probably feel like the market has cooled down. That shapes their sentiment, shaping the urgency of how much they’ll pay. 

This isn’t an unheard of movement either, there’s precedent. At the national level, annual price growth was last negative in 2008. The SNLR had started falling in 2007, but also made a sharp uptick in July of that year. It might have seemed like the trend was over, but it continued lower afterwards. Much like calling a top, calling the bottom of activity can also be incorrect without confirmation.

One month of data might be how all changes in a trend begin, but it doesn’t necessarily mean all trends are changing. A credit-catalyst needs to occur to drive home price growth higher. Rate cuts, QE, increased amortizations, or a cut in down payment, would be examples. If that doesn’t happen, it’ll be difficult to change the direction of the trend. It’s not impossible, it’s just very difficult to abruptly change the mindset of a whole market.

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20 Comments

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  • Ethan Wu 2 months ago

    The bear case is only 5% of the population can buy a home. 5% can’t provide liquidity for 95% forever.

    The Bull case is it always goes up.

    • Sarah 2 months ago

      The Bull case is an inflation crisis. Everyone thinks price will rise because rates will stay low, and they’ll adopt higher inflation. It’s the play from the late 70s again, but they’ll trot out a Realtor to say “this time’s different” like the US did in ‘06.

    • Christopher Barkley 2 months ago

      There are two kids of bears. People that can’t afford a house, and people that are very wealthy and their house is a small portion of their wealthy.

      There are two kinds of bulls. Ones that think a house will make them rich, and middle class people that think they’re rich.

  • Donovan 2 months ago

    Prices obviously have to come down. I’m a homeowner (and made a nice profit), and realize cottages rising 60% from last year is a bubble.

    It may not fall in price, but your value will be trapped for a while.

  • Jason Chau 2 months ago

    I’m with Peter Schiff on this one. They won’t raise rates sufficiently until a currency crisis occurs. Then your home might be the same price, priced in a currency with the same name, but not at all worth the same.

    https://twitter.com/peterschiff/status/1428196606432718848?s=21

    • Igor Krovich 2 months ago

      This is THE take.

      As prices cool, all parties are proposing “affordable” housing plans that involve increasing prices.

    • Old Greg 2 months ago

      BINGO!

  • Bloemie 2 months ago

    Canada’s housing bubble (and there clearly is one) is sustained by popular opinion and irrational exuberance. Till the narrative changes, it is likely to continue. 30 years bull market means that most cant remember a bad. It seen as safe alternate to the stock market, with better returns in many cases. An inflation hedge, a tax haven, a side hustle etc.

    Housing to Canadian’s has become like weather. It comes up in almost every conversation and is usually one sided viewpoints from the individuals perspective. As long as the narrative remains positive, the bubble will continue. A month or two after the majority of these conversations turn negative (declining values, government intervention, tax loopholes closing, mortgage rates climbing etc) there will be a rush for the doors and “beliefs” will be disproved. With 15% of the country make living from housing and those that own / paying off real estate are all gainers, so there is no reason to change the narrative. The only question really is what event will change that narrative.

    Will any of the parties risk changing the narrative – I doubt they will knowingly do it. Better to wait till it crashes for some other reason and swoop in to fix it.

    • returns 2 months ago

      Not true about returns. There are many investments that can give you more returns.
      Canadians are blind.

  • patient investor 2 months ago

    I m going to buy one house in Canada once this bubble bursts, patiently waiting.

    • mario 2 months ago

      Just make sure that you can live that long 😉

      • Patient Investor 2 months ago

        I sold several properties in Canada and enjoying life and free enterprise with low taxes in beautiful Panama. I am turning 39 and can wait. Not a big deal if prices never go down.

  • Patient Investor 2 months ago

    Not investing in real estate housing since situation with covid improved, sold 70% of my real estate and diverted it to other sectors.

  • Neek 2 months ago

    1. All the counties around the world printed tons of money in the last year.
    2. There was not action to recall any of that money.
    3. Inflation is high, which means inflation fighting assets will increase in price.

    • stop 2 months ago

      prices stopped growing in the us

    • ugly cookie cutters for one million and more 2 months ago

      It means only one thing that soon you won’t be able to afford a burger while living in an ugly house that cost one million that won’t belong to you for the next 25 years, enjoy!

    • Vjkenny 2 months ago

      Buy some measures the world as a whole printed more money than in 2008. Much of that money will come to Canada. The job market especially for the unskilled have not recovered, no one will raise rates. Inflation levels are still under control. All the signs point to prices increasing. Maybe Toronto and Vancouver will pop, other cities are still under valued at this point given these conditions.

      • RM 2 months ago

        Inflation levels are still under control? That’s an interesting take given that the CPI hit 3.7% in July, which everyone knows is much lower than reality… not to mention that CPI is a lagging indicator.

      • SailonSailor 2 months ago

        Agreed.

  • Edgar Allan 2 months ago

    “What goes up must come down.
    What must rise must fall……..

    And what goes on in your life
    Is writing on the wall!
    If all things must fall,
    Why build a miracle at all?
    If all things must pass,
    Even a miracle won’t last.
    What goes up must come down.
    What must stand alone?
    And what goes on in your mind
    Is turning into stone!……”

    Alan Parsons

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