Canadian real estate is getting back to normal, but those used to the past couple years might think it’s a slowdown. BMO Capital Markets sent a research note to clients on Tuesday, citing the drop in existing-home sales in July. Sale volumes have now returned to pre-pandemic levels as interest rates normalize, and reverse some of the price gains made as well. Inventory has even returned to balanced, as the lack of stimulated demand is allowing levels to recover to historical norms.
Canadian Home Sales Fell Over 29% From Last Year
Canadian existing-home sales have been plummeting over the past few months, and July was no different. Seasonally adjusted sales were down 5.3% for July, and unadjusted were 29.3% lower than the same month last year. That’s a considerable slowdown from the peak, but not necessarily for the market.
“That leaves activity back in the pre-COVID range, or roughly 40% below the peak of the demand-side blowout seen last year,” said BMO Robert Kavcic. Adding, “it also leaves seasonally-adjusted activity below the average of the past decade.”
“If there was ever any doubt that the COVID boom was a demand-side phenomenon (certainly no doubt here), this chart illustrates it clearly. Notice that sales at one point surged more than 50% above the 10-year average.”
Normalizing Interest Rates Has Pushed Demand Back To Pre-Pandemic Levels
During the pandemic, low rates helped to bring forward demand since budgets grow when less cash is spent on interest. At the same time, those expanded budgets can absorb price increases more quickly. As Canada was flooded with the cheapest mortgage debt in history, it stimulated a little excess demand, as BMO argues.
Typically large inflows of cheap capital attracts investors, helping to compound the demand pressure. All of a sudden, those pressures have begun to disappear as the cost of capital increased.
“The flip side, now that investment activity has fizzled and the pulling-forward of demand has stopped, is that we’re in for a period of benign activity,” explained Kavcic.
“We’re not seeing any abnormal surge in new listings yet (trends there are still very normal), but soft demand should allow inventory to gradually keep building, and prices to keep falling into 2023.”