Canadian real estate prices are surging like never before, but the market is cooling. Canadian Real Estate Association (CREA) data shows the inventory pressure eased in February. Despite big price gains, the SNLR revealed cooling conditions in 80% of major markets. Demand is forecast to cool further as rates rise and locked-in mortgages disappear.
Sales To New Listings Ratio (SNLR)
The sales to new listings ratio (SNLR) is used to gauge inventory absorption and how hot a market is. It’s as simple as it sounds — the share of home sales compared to new listings that month. As the ratio rises the market is getting hotter, since demand is rising relative to inventory. As the ratio gets lower, demand is cooling as it falls relative to inventory. Balanced is smack dab in the middle.
The general guideline is a market with an SNLR above 60% is sellers market. A sellers market is when conditions are tight and prices are expected to rise. When the ratio falls below 40%, the market is a buyers market. A buyers market is when conditions are looser, and prices are expected to fall. Between 40% and 60% is balanced, where demand and supply are balanced.
Canadian Real Estate Has Seen Inventory Improve
Canadian real estate is still tight, but inventory pressure is finally releasing. The national SNLR fell to a seasonally adjusted 75.2% in February, down 13.7 points from the month before. It was the lowest ratio since September 2021, when the market began its second wave of gains. It’s still a very tight market, but a 13 point drop is a completely different game.
Canadian Real Estate SNLR
The seasonally adjusted sales to new listings ratio for selected major Canadian real estate markets and regions.
Source: CREA; Better Dwelling.
Over 80% of Canada’s Major Real Estate Markets Cooled Last Month
Diving deeper, inventory pressures eased in the vast majority of major markets. New inventory climbed faster than sales in 22 out of the 27 major market regions shared by CREA. Two markets were in Quebec, where increases to the ratio were less than half a point and not a sign of tightening. Canada’s Prairies are a little different, with Regina (+4.2%), Edmonton (+2.8%), and Winnipeg (+1.7%) showing tightening. The rest of the country is seeing inventory pressure fall very quickly.
Canadian Real Estate SNLR Change
The month change of the seasonally adjusted sales to new listings ratio for selected major Canadian real estate markets and regions, in percentage points.
Source: CREA; Better Dwelling.
Canada’s Most Expensive Markets Are Approaching Balanced Fast
Toronto and Vancouver real estate are very close to balanced, and got there fast. Toronto real estate saw the SNLR fall to 65.9% in February, falling a huge 23 points from the previous month. Vancouver real estate is cutting a similar path with the SNLR falling to 62.3%, down 5.5 points over the same period. Both markets still have scarce inventory for the level of demand. However, Toronto and Vancouver recently had SNLRs above 100%. This is a totally different market, even if prices are ignoring the change.
Canadian Real Estate Expected To See Demand Taper Further
Canadian economists see this as a potential sign the market will return to balance soon. Demand is further expected to fall as interest rates rise, shrinking mortgage credit. “This could mark a turning point toward more balanced demand-supply conditions later this year,” said Robert Hogue, deputy chief economist at RBC.
He adds, “…even more sellers will need to list their properties to rebalance Canada’s housing market. But we expect rising interest rates will help the process by cooling the demand side.”
National Bank of Canada economist Kyle Dahms adds another cooling factor — mortgage lock-ins. “There is also reason to think that borrowers who had locked in a lower rate are exercising that option in anticipation of higher mortgage interest rates,” he said.
Mortgage borrowers can secure a mortgage rate for up to 120 days, at which point they expire. They then have to face the current level of mortgage rates, which is much higher than they were 120 days ago.
The Bank of Canada warned home buyers of higher mortgage rates in December and January. Buyers that see prices only moving one way, only see the issue of paying more interest later. This most likely stimulated further demand. There’s a reason these announcements used to be a surprise. Central banks try to avoid causing FOMO by doing a last call for cheap debt.