Canadian real estate is in for a short-term boost, but market factors are likely to cool demand. BMO‘s Robert Kavcic’s latest research note covered Toronto real estate’s September boom. The bank’s senior economist sees a short-term boost to demand, as conditions tighten. This should be tempered by a rising rate environment in the not-so-distant future. While he was discussing Toronto, similar conditions can be observed across the country.
Toronto Real Estate Is Seeing Sales Fall, But Still Historically Strong
Toronto real estate sales are still lower than last year, but strong compared to any other year. Existing-home sales dropped 18% in September, consistent with lower sales this year. On a seasonally adjusted basis though, monthly growth is actually higher. The trend is further complicated by an inventory squeeze.
Toronto Housing Inventory Is Falling Faster Than Home Sales
Greater Toronto has seen inventory fall faster than sales. TRREB reported new listings dropped by 34% in September when compared to the same month last year. Active listings also fell by 49% over the same period. In general, inventory fell much faster than sales, leading to tighter conditions.
A tightening of the market is applying more pressure on home pieces. TRREB reported annual growth for prices accelerated to 19.1% in September. This is a sharp move from the 17.4% reported in the prior month, after a substantial monthly climb.
For those in need of a refresher, the annual growth for Toronto’s benchmark peaked in June. It then fell right through to August, showing some signs of “cooling.” It was still a very high rate of annual growth, but it had been tapering. That is until the election, when all major parties promised to stimulate demand.
“Toronto’s housing market is firming again after ‘cooling’ through the spring and summer,” said BMO. “We use the word ‘cooling’ loosely because, while activity has backed off from astronomical levels, it is still historically strong by almost any metric.”
Expect A Short-Term Boom For Home Prices
“What now? We shouldn’t be lulled into thinking that outsized strength is all gone,” he said. “If election campaign promises make their way through to policy, we could see a small net stimulative impact on demand (which we clearly don’t need).”
As we’ve discussed before, most policy measures proposed were to increase demand. The strategies are actually how other countries boost prices, sold as affordability measures. A few of Canada’s top economists echoed this sentiment earlier this year. They were joined by BMO, Scotiabank, and RBC on that one. If these promises become policy, they should provide a boost to home prices. At least a small, one-time boost due to increased demand.
The Credit Environment Will Cool The Market
Though don’t expect the same kind of lift we saw going into the pandemic. Rising bond yields pushed by inflation is likely to throttle demand — most likely more than the boost from policy. “… there’s probably upside risk for fixed mortgage rates, which could help prevent another major breakout; or the BoC…in 2022,” he said.
During the pandemic, rates fell increasing the credit capacity that could be carried. Now that the recovery is here, and inflation looks less transitory, rates are likely to rise. Add to that, the BoC is widely expected to increase rates in the second half of next year. Home prices are facing the inverse environment that lifted growth during the pandemic.
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