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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