Official numbers won’t be out until tomorrow, but they’re expected to reveal market weakness. BMO Economics is calling a slowdown for July’s existing home sales and price data. Almost all of Canada’s major real estate markets have reported eroding market activity. This is expected to work its way into the national data, as higher rates send a message to markets.
Canadian Real Estate Sales Are Forecast To Drop
Existing home sales are forecast to show a monthly drop, ending a five month growth streak. “The housing market’s recovery lost some steam in July as the Bank of Canada raised rates for the second straight meeting after pausing earlier in the year,” wrote BMO to investors.
The bank adds, “Following five months of gains after the Bank went on the sidelines, sales look to fall on a monthly basis. Still, we expect they rose 10% over weaker year-ago levels.”
It might be confusing to see BMO emphasize a slowdown, then forecast annual growth. This is due to a base effect, with last year having one of the slowest July’s on record. Showing just 10% annual growth doesn’t reflect the strength of the recent market. On a monthly basis, the forecast works out to a whopping 16.7% decline from a month before. Not only is the market still slow, if BMO is correct, the market is heading in the wrong direction for a recovery.
Canadian Home Price Growth Is Slowing
Earlier this month, Canada’s major real estate markets reported monthly price declines—but national data may lag. The bank’s July forecast sees the MLS HPI 1.5% lower than last year. That’s actually a slight improvement from the 4.5% decline in June, meaning improved growth. However, it’s worth noting the MLS HPI underwent major changes recently. Prominent analysts have suggested the index no longer reflects reality, obfuscating trends.
For those in that camp, the average sale price remains. Annual growth came in at 6.7% in June, but is forecast to decelerate to 3.5% in July, according to BMO. It shows higher growth, but followed by a sharp slowdown. At this rate, average sale prices could plunge back into negative territory soon.
Rising interest rates are the primary factor behind the forecast returning to a market slowdown. After the “pause,” exuberant market players jumped back in, assuming the worst was over. Since then two hikes have sent a message to investors.
As for a return to end user activity, don’t hold your breath. Rising rates have dropped prices faster than they’ve increased financing, helping to improve affordability. However, buying a home is still way out of reach for most end-users in local markets. The low-rate surge pushed affordability to one of the worst levels ever, as investors displaced first-time buyers. It would take years of mild price growth to see affordability return to just upper middle class households.