Canadian Real Estate Market Is Balanced, But Spring Activity Uncertain: BMO

Canadian real estate markets are seeing activity pick up, but don’t read too much into it. That was the general take from BMO, responding to CREA existing home data for January. Home sales picked up substantially, but the bank warns activity is rising from unusually low levels and winter data is volatile. In addition, the cheap financing that was fueling the uptick in home sales is starting to disappear quickly.

Canadian Real Estate Sales Rise From Unusually Low Levels

There’s been no shortage of people pointing out increased market activity last month. Seasonally adjusted home sales saw a monthly increase of 3.7% in January. They’re now a whopping 22% higher than the same month last year. It sounds like frenzy-brewing data at first glance, but a little context should cool expectations. 

“Activity has firmed, but part of the big gain is the result of an easy year-ago comparison,” explained Robert Kavcic, a senior economist at BMO. 

Adding, “… it’s also worth reminding that this is Canada: we have winter, and it can be variable and messy.” 

A mild winter and falling interest rates are helping to boost sales, but they remain tepid at best. At least in a historical context. 

Canadian Real Estate Inventory Is At A Healthy, Long-Term Average

Canadian real estate markets are generally seeing more inventory these days. Seasonally adjusted new listings saw monthly growth of 1.5% in January. Unadjusted they were 10.5% higher than last year, a substantial increase. Huge growth, though only half the rate seen when it comes to sales. 

Sales outpacing growth helped firm the sales to new listings ratio (SNLR), the industry’s preferred indicator for determining relative demand. The SNLR rose to 58.8% in January, within the range of balanced territory. When this level is maintained, prices are expected to move sideways. 

Source: BMO; CREA. 

Kavcic says this is “bang on” the 10- and 20-year medians for the SNLR. “In other words, we’re almost seeing a perfectly balanced resale market again when looking at the aggregate Canadian numbers,” he explains.  

Speaking of a balanced market, prices continued to fall but not quite at the pace observed last year. The CREA benchmark (typical) home price fell 1.2% in January, and prices remain just 0.4% higher than the same month last year. Once again, just like winter data puts a damper on the meaning of sales, it should also be considered with home prices. 

“Activity in the December/January period is the least liquid of the year, with sales usually running well below half of peak spring volumes,” warns Kavcic, who believes we won’t get an accurate picture of the market until this Spring. 

A Booming Spring Markets Is Far From Guaranteed At This Point

Market ambiguity doesn’t just end with sales data, according to the bank. Home sales have been getting a boost from expectations of rate cuts, and cheaper fixed rate mortgages as bond yields declined sharply. As we’ve seen in the past few days, both of those expectations have experienced a bit of a kink. 

Elevated inflation expectations and a resilient job market are likely to delay rate cuts. BMO has pushed their forecast out, now expecting the first cut mid-year at the earliest. “… while 5-year GoC yields have quietly risen by more than 50 bps since the start of the year,” he adds. 

Falling bond yields have provided much of the lift in home sales observed. Now that they’re rising rapidly ahead of the Spring market, it throws even more uncertainty into the mix.