Canadian new home prices are growing at one of the fastest rates in history but they’ve begun to slow. The Statistics Canada (Stat Can) New Housing Price Index (NHPI) shows huge annual growth in October. Not quite as obvious, the growth has fallen from the August peak, which had been the largest since 1989. The level of growth historically has been followed by a breather, where incomes catch up. If it’s begun its descent from peak growth, this can see low to negative price growth become a reality soon.
Canadian New Home Price Growth Is Up 12%
Canadian new home price growth printed some huge numbers last month. The index increased 0.9% in October and was 11.5% higher than the year before. It’s a very large and unusual growth that’s really kind of hard to appreciate without context.
New Home Price Growth Has Fallen From It’s Multi-Decade High
New home prices have advanced at one of the fastest rates in Canadian history. Last month’s annual growth is just a little below the 12.2% observed in August. It was the peak growth rate this cycle, and the highest rate since 1989. It’s an unbelievable amount but as you can see it’s extremely rare for this kind of growth to stick.
Canadian New Housing Price Index Growth
The 12-month percent change of Canada’s New Housing Price Index (NHPI).
Source: Statistics Canada; Better Dwelling.
Historically This Rate of Growth Is Followed By A Slowdown
To highlight this extraordinary growth, one just has to look at the home price boom a few years ago. During the 2017 surge, new home prices only observed a peak annual growth of 3.9% in April. By April 2018, growth had fallen below 2% and remained at that level until well into mid-2020.
During that period there was a population boom that had even accelerated. However, the increase in population couldn’t move the needle much higher. It wasn’t until the population growth slowed, along with a massive credit injection, that we saw growth return. The credit stimulus injected created more demand than population growth did.
Why is this important? Rapid price growth due to a supply squeeze, especially driven by credit, is volatile. Earlier this month, Moody’ warned institutional investors that a rapid rise in prices presents a greater chance of correction. As rates rise, the easy credit that drove prices higher is going to be reduced.