Canadian Real Estate Is Proving To Be A Story of Excess Demand: BMO

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.”

6 Comments

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  • richard stanbridge 4 months ago

    central banks are like the catholic church. completely unaccountable.

    they have clearly never heard of say what you do and do what you say

  • Shawn 4 months ago

    I appreciate the honesty from BMO but this is also just common sense. How could the policy makers and banks not have seen this coming?

    • David Chan 4 months ago

      You’d be surprised how many people think this isn’t how monetary policy works. Some clown economist is now using entirely fictional numbers “the estimate of households that would have been made!”

      Now that there’s no demand, what about the imaginary demand‽

  • Economisto 4 months ago

    Even donkeys were aware of that. But not Tiff Macklem…

  • M 4 months ago

    “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. — sure, but a few new factors at play: everyone is now clued into the idea that real estate doesn’t only go up; various foreign countries that Canada relies upon to boost RE have increased capital controls + have their own crisis to work through; that wages remain slightly elevated due to inflation hardly matters – a vanishingly small percentage of people in Ontario and BC can purchase properties on their own merits/income (i.e. without leveraging other RE assets).

    Pretty tough to sell little 2 bedroom condos at >$1M to households earning 85k, regardless of mom and dad remortgaging their house. And as an investment, unless you’re making a bunch on the market increase or need to launder the cash, it’s an absolute trash proposition.

    To my mind, BoC will have to quickly drop interest rates to avoid a full-on meltdown in Canada’s two biggest markets, if not, a 30% drop from the peak will have looked highly optimistic in retrospect. DOM is much worse than official stats suggest.

  • Edward 4 months ago

    This was always clear for people with any kind of math mind that understands stats. The whole “supply issue” argument didn’t make sense because how the super RAPID and UBIQUITOUS rise in house prices across the entire nation. A supply issue doesn’t manifest itself in every town all at the exact same time…

    However, if a central bank were to slash interest rates to deeply negative territory in real terms and promise to keep them “low for long” with a goal of boosting asset prices… this would cause a rapid and ubiquitous increase in demand of people fighting to borrow money at negative rates to get a piece of that stimulus asset growth. And this is what happened… investors rushed the market and anyone remotely thinking of buying a home that understood what was happening did too, which caused FOMO and turbo charged demand further

    Makes a lot more sense than every town in an entire country having a supply shortage hit at the exact same time, no?

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