Canada

Canadian Real Estate Is Past Peak Momentum, Says Big Six Bank Economist

Canadian real estate markets booked another hot month, but it may have marked the top. At least for market momentum. BMO senior economist Robert Kavcic says April may have been the peak for market momentum. Various factors are coming to a head that will lighten some pressure on the gas.

Homes Sales Were Strong, Even By Historic Levels

There’s no way to see last month’s numbers as anything but very strong. BMO acknowledges Toronto home sales were “roughly 45% above ‘normal’ levels for that month.” They looked past the annual comparison, due to the skew of being the first lockdown month.

They also acknowledge price growth continued to accelerate. The benchmark price increased by 17.8% in April, compared to a year before. Price growth didn’t fall by much last year, so the annual comparison is still meaningful. Unlike sales, which suffered from an artificial constraint.

Source: BMO Economics; TRREB; Better Dwelling.

The bank also observed this trend extends to more than just Toronto. It’s a national thing. From what we’ve seen, it’s actually more difficult to find a market that isn’t hot these days.

“The point here is that, looking past some wonky comparisons, resale markets remain extremely strong by historical standards,” he said.

Canadian Real Estate Markets May Have Just Passed Peak Momentum

The market was on fire, but the economist has a few reasons to believe things will cool from here. Mortgage pre-approvals that were locked at record lows are rolling off. The BoC is trying to project hawkishness. He also sees people potentially starting to focus on post-pandemic life. Focusing on life outside of the house, may shift exuberance from being all-in on the house.

Mortgage pre-approvals are one point that hasn’t been brought up often. For those that don’t know, some lenders will pre-approve mortgages. This can often come with a “rate lock,” holding record-low mortgage rates. These pre-approvals typically last 60 to 120 days. As BMO points out, most of the pre-approvals issued at record low rates would be expiring by now. New pre-approvals would face higher mortgage rates. Not sky-high, but a little higher is enough to put a damper on things when you’re at record lows. 

Even though it’s past peak, that doesn’t mean the market is going to completely fade right away. “Still, even if the rate of change chills out, it’s going to take more to seriously slow a market that remains extremely hot” he said. 

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13 Comments

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  • Christopher Barclay 4 months ago

    Completely logical take. Almost too logical.

    I’d really love to see the market go for another 25% beat though.

    • Ethan Wu 4 months ago

      If it can go up 25%, why not 50%? We’re only talking about the marginal buyer. They’re even willing to lose money to rent it out to people.

    • Doomcouver 4 months ago

      Why would you want it to go higher? Are you wanting to cement Canada’s status as the largest housing bubble in recorded human history? Because I have news for you, we’re probably already there.

  • Shoeshine Boy 4 months ago

    I think we see a May boom, and then a supply overhang because everyone and their mom thinks if they just hold on, it’s going to go up a little more, then they’ll sell.

    Generally agree though. You can usually tell by the type of person buying if it’s topping.

  • Holton 4 months ago

    Yes, because we will be putting in cooling measures to cap price increase for real estate. The strategy is to control housing price growth and increase inflation over extended period of time. So housing becomes cheaper relative to all other goods in say 10 years. At least that is the only reasonable option we have.

    What we should have done was let housing go down last year. We have should put in measures to even out the distribution of real estate wealth in form of taxation on people and companies that own multiple residential properties.

    Guys, the truth is we cannot afford to crash the housing market now. Especially when we see inflation coming down the road, which we can use to our advantage, as Asia have done for the past 2 decades. Do your research on Chinese / Korean housing price increase and real inflation numbers and you will understand.

    Focus on wage growth, real estate wealth distribution and controlled/managed inflation.

    • Average Man 4 months ago

      Holton, lemme tell you a story about Ireland…

  • Kolf 4 months ago

    I think the Holton dude is right. The whole world is flooded with money now and high inflation expectations. I don’t know who people are still thinking the market will crash. Also, 1.3 million high net worth or high skilled immigrants are coming. Yup, all going to crush prices some how.

    • Average Man 4 months ago

      Re. The immigrants.

      1) By the time we all get vaccinated, assuming it happens on time, we will have had 18 months with next-to-no immigration. And vaccines in our source countries are gonna be hard to come by for years. I’m not sure where these people are coming from.

      2) Canada got a Trump Bump in immigration, where folks who would have gone to NYC or Silicon Valley came here instead. I think the immigrants who are gonna be coming in 20whatever are gonna be less wealthy and less skilled.

      3) I think you will see more and more Canadians emigrating, as well.

      4) Are immigrants gonna keep coming to a country where they don’t have their credentials recognized and where home ownership is increasingly out of reach of the middle class? I mean, sure, refugees will come, but economic immigrants will probably be able to get a better deal somewhere else. Hell, if you’re able to qualify under the points system, you’d probably do better staying where you are.

      5) I would not be shocked, even in multicultural Canada, to see a strong surge of anti-immigration sentiment in the coming year. Maxime Bernier failed because he was a racist nut, but imagine a very calm, stat-driven immigration reduction platform instead. Now imagine it coming from a brown face? It would go over very differently.

      Latinos in South Texas were some of the biggest supporters of the wall. It’s not crazy talk.

  • Ashley 4 months ago

    There are more headwinds for house prices to go up than go down. Mortgage rates just went up again: https://rates.ca/resources/rbc-unexpectedly-lifts-fixed-mortgage-rates.
    The whole narrative that historical interest rates are driving prices higher is no longer true. People have re-directed their saved expenses from travel, eat out, commute,… to housing, however all those expenses will come back as we get back to normalcy and with inflation uptick those expenses will be higher than pre-pandemic levels.
    With bidding wars buying a house can be frustrating, more frustrating will be to think every month what to cut down on to pay the mortgage.
    In current state, decline in house prices will do more good than harm.

    • Mortgage Guy 4 months ago

      I guess you didn’t understand the pre-approval point the bank economist just made.

      • Ashley 4 months ago

        I understood the point re: pre-approval which is why I am saying lower interest rates that were being said a reason for price increases are no longer the driving force. RBC has increased mortgage rates again and people looking to buy 6 months from now will have a much higher pre-approval interest rate . Along with this, the inflation will increase the prices which will further reduce the available income.

  • GP 4 months ago

    Fixed rates are going up. Did variable rates go up?

    • Ashley 4 months ago

      Both fixed and variable went up by 20bps, new rates fixed 2.69% and variable 1.8%.
      I presume other banks and then private lenders will follow the lead.

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