Canadian real estate has cooled even faster than bears assumed possible. The sales to new listings ratio (SNLR) indicates it’s just getting started. If historic patterns hold true, the market will see all of 2022’s gains disappear by mid-summer. Unless something changes the trend, home prices are heading in the direction of improved affordability.
Sales To New Listings Ratio (SNLR)
The sales to new listings ratio (SNLR) is a simple but powerful indicator for getting a picture on demand. It’s a straightforward measure of the share of homes sold to homes being listed for sale. In Canada, this is the industry’s preferred measure of relative inventory demand for the current price point.
If you’ve ever heard the terms sellers’ or buyers’ market, this is the measure typically used to determine it. An SNLR above 60% is a sellers’ market (prices tend to rise) and below 40% is a buyers’ market (prices fall). Between 40% and 60% is balanced, where the market is priced just right for demand. Since markets are self-balancing without state intervention, prices fall until demand returns.
The SNLR isn’t just great for an active gauge of demand but it’s pretty good for checking where prices are heading. Previously we explained that the SNLR leads the market by about 3-months. More recently, an analysis from BMO confirmed that finding. So let’s check out where the trend is projected to take the market.
Canadian Real Estate Prices Have Shown A Close Relationship With Inventory
First let’s discuss how this trend has performed over the past few months. Canada’s major cities had an aggregate SNLR of 57.55% in May, down from 66% a month before. The market officially entered balanced for the first time since June 2019. It’s been a minute since the market was this slow.
Using the SNLR to forecast previous months has produced solid estimates recently. The benchmark (“typical”) home price peaked at $839,000 in March, a record high. The SNLR indicated a swing would occur, forecasting the benchmark at $829,900 in April. The actual month was reported at $829,400, just a few hundred below the forecast price. Not terrible, especially considering how few people thought prices could swing that fast.
Last month, the SNLR-based forecast also acted as a solid indicator for the benchmark. The 3-month leading trend showed prices would fall to around $822,600 in May. CREA reported the benchmark at $822,900 last month, even closer than the previous forecast. Forecasting has a lot of moving parts and trends can shift dramatically. However, this is close enough that it’s worth paying attention to.
Canadian Real Estate Might See 2022 Gains Disappear By Mid-Summer
The deterioration of the SNLR indicates we’re going to see a fairly substantial drop in price by August. In May, the SNLR indicated a benchmark price of around $771,500 by August. This would be an 8.0% ($67,500) drop from the March 2022 peak. Not enough to be considered a crash or correction, but that takes prices back to November 2021. Absurd gains where prices jumped tens of thousands per month in Q1 would disappear.
Forecasts are based on snapshots of the market at the time of reporting. The variables within can change abruptly, especially when the changes are policy-driven. Make sure when you see forecasts, you understand they apply only if the trend continues to follow. If things get better, price drops can slow or even reverse and start rising. Similarly, if things deteriorate further, more inventory shows up and sales don’t, it can fall faster.
Now you have a baseline expectation to monitor. Keep an eye on these levels and see how expectations evolve — and may the odds be ever in your favor. Whoops. Are we not ready for Hunger Games references yet?