Canadian Real Estate In A “Bizarro” Scenario, Where Reopening Might Be Worse: BMO

Canadian real estate always marches to the beat of its own drum, which may not be a good thing soon. BMO senior economist Robert Kavcic shared his take on last month’s home sale numbers. He observed a strong market, but said it continues to show we’re past peak momentum. He warns of a potential “bizzaro” scenario, where a better economy means a housing slowdown.

Canadian Homes Sales Are Cooling From Peak Demand

Two key real estate markets are showing slowing home sales, and have been for a few months now. June home sales in both Toronto (-7.1%) and Vancouver (-11.9%) fell from the month before. Both markets are near to entering balanced territory. Not exactly something many would have seen this quickly, just a few months ago.

“Home sales in Toronto and Vancouver continued to cool in June, but let’s keep in mind that we’re still ‘cooling’ from astronomical levels,” says Kavcic. “In both cities, sales activity remained above pre-COVID norms in the month.”  

Toronto and Vancouver Home Prices Hit A Wall

Cooling home sales have yet to relieve pressure from prices, according to the bank. Annual price growth is soaring in Toronto (19.9%) and Vancouver (14.5%). “The overall market balance continues to support solid price gains,” said the economist. 

Though annual gains were strong, it’s worth taking note of the monthly slowdown. Both Toronto and Vancouver are showing an unusual monthly drop in prices for the city. Suburban markets are still on a tear, but it feels like the market may be turning a corner. 

Canadian Real Estate Is Past Peak Momentum

While the bank said the market is still strong, they did say the peak momentum for real estate is behind us. “Prices in some segments might be finding resistance,” he said. The detached market in the City of Toronto, and the City of Vancouver is likely what they are referencing.

The real estate market has been playing out in an unexpected scenario, which he calls a “bizarro cycle.” As the recession became worse, the market improved and prices picked up steam. Now that we can see the light at the end of the tunnel, the market is suddenly becoming softer. 

If a slowdown materializes, the way cheap credit pulls forward demand will play a part in why. Falling mortgage rates allowed larger budgets, meaning people didn’t have to save quite as much. Buyers that might have been thinking of purchasing a couple of years later, might be able to purchase earlier.

More pressure on sales today, but that buyer is no longer buying in the future. The economy has already seen the benefit of that person’s buy into today’s window. 

This leads to higher home prices in the near term. Rising prices, especially this fast, tend to apply fear to other buyers, who fear being locked out. This pushes prices even higher, producing that “shortage” you keep hearing about. As demand catches up, it brings relief to buying activity. This should ease pressure on prices.

Is that where the real estate market is heading? Given how much demand was seemingly pulled forward, that wouldn’t come as a surprise,” said Kavcic. 

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  • Liam 3 years ago

    The pandemic was like summer vacation for everyone. They did whatever they want, if they lost their job, the government gave them money. No one needed to pay their mortgage. It was fine not to eat out, people didn’t want to go on vacation, or spend time with family.

    Now that’s changing. Responsibilities are coming back, and you’ll feel dumb pushing your budget to the limit, without unlimited state safety nets.

    • Trader Jim 3 years ago

      Some of that. Don’t forget the madness of the markets may include everyone discussing it, but not everyone buying it. You only need a small portion of people to buy into the narrative. How long can someone continue to buy the narrative though?

  • Van YIMBY 3 years ago

    Plus higher interest rates. People think mortgage rates are low because they’re low everywhere. Not even close. QE drove rates much lower than they ever should have been. They were terrified of home prices dropping.

    Mortgages are cheaper in Canada than the US. The US can lend for practically nothing since it’s the world’s most liquid currency. It’s hard to explain how much they screwed the pooch, and are trying to convince people they aren’t pulling back on pumping home buying activity.

  • Megan 3 years ago

    This market is stupid, and would need to cool down regardless of what’s happening. My husband and I have a $400k downpayment gifted to use, both have six-figure jobs, and the city we’re located in means we can buy a condo and pay $1000 in maintenance fees on top of the mortgage, and then another 5% to sell it later, ormove.

    and no, not everyone’s job allows them to work remoteley.

  • Patrick O 3 years ago

    I’m guessing that’s why there’s so much discussion about an election now. If they don’t get 4 years locked into the fall, they’ll have to wear a housing slowdown as their failure.

  • Ahmed 3 years ago

    When even the bank lending you the money thinks you’re an idiot.

  • Casinomist 3 years ago

    Mortgage deferral allowed lots of people to use that money and buy more homes. I have a client who complains she’s in a tight budget. I’m re-roofing her 5th house. Only god knows how many more she owns.

    We were allowed to name and shame all toilet letter hoarders but keep a blind eye on home hoarders and squeeze middle class to make their life more miserable.

    Can’t believe the BOC is using the same slogan as freshco when it comes to interest “keep keep – cheap cheap”

    • Paul 3 years ago

      I really like hearing stories where it’s boots on the ground and eye witness accounts. The majority of these house hoarders have purchased with huge amounts of debt. What makes them different from the next over leveraged user? Nothing.

      • Ron 3 years ago

        At the moment if they sell one house they could be mortgage free for the rest .

        • Axel McLion 3 years ago

          So they own 80% equity in all 5 houses? I think it’s more likely they own 20% in each, so they’d have to sell 4 to be mortgage free for 1.

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