Canadian real estate sales are expected to remain weak until prices fall further. That was the take from BMO Capital Markets, whose latest report cites the gap between buyer and seller expectations holding sales back. Until that gap is closed, either by force or voluntarily, sales will remain weak relative to historical levels. The bank sees the latter to be the most realistic option.
Canadian Real Estate Sales Improved, But Remain Historically Weak
The bank focused on Canada’s largest real estate market and its recent surge in sales. Toronto home sales in July were up 10.9% compared to last year, marking a fourth consecutive month of seasonally adjusted growth. Any improvement is better than none, but there’s a mighty big asterisk on that growth.
“Of course, the starting point here was extremely low for Toronto, and sales remain well below the past-decade average,” explains Robert Kavcic, senior economist at BMO.
He touches on a point that was largely glossed over—home sales were unusually weak. For context, the volume of sales was just slightly better than July 2017, when a mini-crash occurred with the rollout of non-resident home buying taxes.
If that wasn’t a recovery, what would it take for home sales to recover? The sharp decline in prices also observed last month is a hint.
Canadian Real Estate Sales Held Back By Gap Between Buyer and Seller Expectations On Price
Source: BMO Capital Markets.
The gap between seller and buyer expectations is too wide for a deal to be made. Falling prices and higher sales last month served as strong proof, but sales remained tepid, implying there needs to be more give to restore market health.
“A wide bid-ask spread, so to speak, has kept the market from clearing and has left listings to go stale,” explains Kavcic. He sees only three realistic possibilities to resolve this—forced selling, lower mortgage rates, or price cuts.
Forced selling would require a serious recession, job loss, and surging delinquencies. This would force sellers to seek lower prices, trying to avoid default. This is the least realistic of options, according to the bank. “We’re not seeing that, and we don’t want to,” he notes.
Lower mortgage rates are more realistic—though more realistic isn’t necessarily realistic. The bank’s math suggests rates in the low 3% range would provide enough stimulus to pick up home sales, requiring rates to fall about 100 basis points (bps). They see another 50 bps of cuts from the Bank of Canada to be difficult, and that only gets the market halfway there.
Price cuts are the last option, and the one that’s “going to clear the market,” says Kavcic. He notes that progress has been slow, but prices are starting to come down and that’s helping the market. Further reductions would help get more deals done.
While the bank presented three options, two aren’t realistic expectations. Canada’s economy is slowing, but it’s far from seeing forced selling and a deep recession materializing near-term. Falling mortgage rates may seem simple, but that would also require a serious erosion in demand to weaken inflation. That would also mean households are weak, making any boost in purchasing activity also difficult to see. Price cuts after one of the biggest surges in prices is the most realistic, but let’s be honest—human nature is rarely this rational.
Real estate prices depend on the job market and prospects of future employment. Low income/wages isn’t an indication that you can afford a home. Unless you work for the government, which is now 25% of Canadian employment/economy, and for future uninterrupted pensions, you must compete on the global stage. Supporting 25% of the Country now and into the future doesn’t promise a home purchase for those competing on the global stage.
Finally, a more realistic view other than RE spin and Hype..
Buying a home is unaffordable for anyone working for a living and first time buyers… ( apart from money launderers and tax fraudsters…)
Anyone who could buy a home already has, the only sales will be from those with large existing equity.. likely those who bought before 2015 or so..
Prices will decline or stay flat until the historic value of price to family income gets back into the 4-5-6 range ( & even that can be a stretch for some. )
It’s going to take 5-10 years of wage inflation to get back into that range if prices stay where they are… which is why I think that more price declines are inevitable as there will be a lot of people who HAVE to sell.
Just had a chat with my mortgage officer at my local big 5… despite what is published, new mortgage applications are getting much more checking and verification that they did before, and credit is much tighter to get.. A bit of that in 2019 – 2023 might have gone some way to restraining the bubble..
Ed
I wonder who’s gonna cover the money that people lose in real estate transactions. The banks, you feel this is all some stock market game I feel? Destroying everyday peoples savings and equity to live a decent life in canada?
Forced or voluntary sale. Are there others?
Wordsmithing so they are right wherever the trend goes.
Let’s be honest, Canada has allowed money laundering for years and much of that money has been laundered on the backs of actual families who just want to lay roots down. The Corporation of Canada is not what it is purported to be. That laundered money came from nefarious sources operating in Canada. Trump turned the lights on and the roaches are scattering.
I bought my first house in Toronto 75 years ago, have purchased numerous properties over time, and have seen many price fluctuations, both up and down. Ultimately, it doesn’t matter. If you hold on to your property, over time, it will increase in value. Buy when it’s down, sell when it’s high.
Canada might be getting cheap – but the USA is off the charts with cheap deals on new and resale homes.
If you are into farming buy in the USA. Farms are ultra cheap.
Be surrounded by 340 million hungry people.