Canada’s real estate market is hard to keep down, but getting up won’t be easy. Canadian existing home sales fell in August, while new listings continue to climb. The easing conditions have led to a balanced market, but will exuberant buyer’s return after the Bank of Canada (BoC) pause? BMO Capital Markets sees it as unlikely, warning the market is very different today than at the top of the year, when the previous pause occurred.
Canadian Existing Home Sales Fell In August
Canadian existing home sales showed further weakness. Seasonally adjusted sales fell 4.1% in August, but remained 5.3% higher than last year. Last year was unusually weak—likely due to sentiment, not fundamental support. It doesn’t provide much insight, and market strength fading this year may be a bigger headwind.
Canadian Housing Inventory Is Rising
Good news for buyers—as more inventory hit the market. Seasonally adjusted new listings climbed 0.8% in August, and unadjusted listings were 5.5% higher than last year. It’s not a lot more, but the steady increase over the past few months is beginning to add up.
“After a dearth of new listings earlier this year helped lift prices off the floor, supply is now coming to market at a rate in-line with historical norms again.,” wrote Robert Kavcic, a senior economist at BMO.
More new listings and fewer home sales are combining to relieve even more pressure, Kavcic says. The sales to new listings ratio (SNLR) fell to 56.2% in August, meaning demand was balanced for supply. He emphasizes how big of a change this is, with the ratio being as high as 67% as recently as this past April.
“That [rising inventory], combined with sluggish sales, continues to soften the market balance in a meaningful way… This reflects balanced conditions now a few notches below the 10-year average” he notes.
What About The Pause
However, that was the calm before the pause. Last time the Bank of Canada (BoC) shared a pause with the public, the market quickly regained steam. Everyone is wondering if that’s going to occur this time, but BMO doubts it.
“The Bank of Canada’s September 6th pause will help market psychology, and we wouldn’t fully write off this market given underlying demographic demand, but there are a few reasons why this pause might not provide the same burst it did in the spring,” he explains.
He cites a weaker labor market, more listings, and a tougher mortgage market, as hurdles. Unemployment is now 0.6 points higher than the record low, and job vacancies are down 230k jobs. More listings are arriving, especially with a period of record construction expected to be flipped into the market. As for mortgages, there’s no rate relief this time—and that means no credit injection to fuel speculation.
Mortgage conditions are the largest factor preventing exuberance from returning. During the last pause, the market was expecting a recession soon, and falling rates. Not this time, with both Canadian and US yields approaching a 16-year high, and central banks still using a hawkish tone.
“That leaves the lowest available mortgage rate today (typically 5-year fixed) about 100 bps higher than the lowest that was available (2-3 year fixed) in the spring,” says Kavcic.
The shift in conditions means today’s investors will face less leverage, and more difficult input costs. Mom and Pop speculators are also likely to encounter resistance in obtaining leverage too. “…our simulations show that the payment shock is becoming more severe the deeper into the renewal cycle we go,” he warns.
Back in the late 80’s the Toronto housing bubble was considered a bubble because the average home in the GTA was 5x the average household income. Now in 2023 the average home in the GTA is 10-12x the average household income.
From 1993-2005 it was below 5. Since 2006 it’s above 5. That’s 17 years of housing bubble in Toronto.
Can’t have a meaningful life if you waste most of your money on rent or servicing your mortgage. Can’t get a better job because there are none and it’s highly competitive to get a high paying job. Love this city, it’s a real peach. Wish I was never born here.
Blame Tiff Macklem and Company. Keeping rates as low as they have for a decade and literally telling Canadians to go and take out a risky mortgage right at the peak.
I’m also a bit disturbed by sentences like this out of no where from the Bank of Canada, as if we were in some kind of monetary experiment in 2021:
“At the same time, there has been considerable debate recently about the role of sovereign currencies in supporting greater fiscal capacity. Proponents of modern monetary theory (MMT), for example, argue that currency-issuing states face few—if any—budget constraints (Kelton 2020). It is far from clear if this idea applies as widely as MMT scholars suggest (Bonizzi, Kaltenbrunner and Michell 2019; Henwood 2019). Still, seigniorage is likely to remain an important resource that governments want to preserve, not only as a source of ongoing revenue but also, more importantly, as a flexible fiscal option in exceptional circumstances. Seigniorage is also critical to the financial autonomy of central banks. If seigniorage revenues fell so low that central bank operations had to be financed through taxes, this could raise important concerns about central bank independence and the politicization of monetary policy (Engert and Fung 2017).”