Canadian Real Estate Prices To Fall Further Than Expected Due To Yields: TD

The Canadian real estate outlook is getting dimer, at least in the near term. TD Economics made a downgrade to its forecast for home sales and prices. Interest rates have climbed higher than anticipated, and the bank warns that will slow things down even further than thought. 

Canadian Bond Yields Are On A Tear, Which Is Bad News For Home Prices

Interest rates impact Canadian mortgage rates, and those are on the rise. In particular, the Government of Canada (GoC) 5-year bond yield is a key product influencing the 5-year fixed-term mortgage rate. TD had forecast it would peak at 3.75% back in June, but we’re well past that point. They now see it peaking at 4.0% in their latest analysis, based on a September forecast. Higher rates mean more credit being throttled, lowering demand expectations.   

Source: TD.

Higher Mortgage Rates Are Going To Slow Home Sales & Bring Prices Lower

Higher mortgage costs have the bank revising its national outlook for sales and prices. Home sales across Canada are now expected to fall 10.7% this year. Only a partial recovery is seen next year, with sales forecast to rise 5.2% from this year’s forecast. 

Fading demand is also expected to erode prices in the short term. The bank is forecasting a 3% drop for average sale prices this year, and just a 0.5% gain by the end of next year. Only a minor price drop, but it’s worth noting next year isn’t even expected to keep up with inflation. 

BC and Ontario are two markets expected to be hardest hit. In BC, the bank sees home sales falling 7.9% this year and recovering partly by rising 6.8% next year. The average sale price is also expected to drop 1.4% this year and recover part of the loss with a 1.2% gain next year.

Source: TD.

The trend in Ontario is much more extreme, likely due to significantly more exuberance. Home sales are seen falling 13.2% this year and only recovering a 3% gain next year. Similarly, the average sale price is forecast to fall 5.3% this year, followed by another 0.5% drop in 2024. It isn’t until 2025 that the bank sees home prices grow by 2.7%. 

Nova Scotia To See The Biggest Drop In Home Sales

Ontario’s home sale decline is sharp but certainly not the worst expected. Nova Scotia (-18.9%) is expected to drop the most this year. It’s followed by Newfoundland (-15.7%) and  New Brunswick (-13.4%). The only thing even close to growth is the forecast for Saskatchewan (-0.8%), which is barely expected to move. 

Ontario Home Prices To Lead Canadian Provinces Lower

Ontario is forecast to be the king of falling home prices, with the sharpest drop. Manitoba (-2.3%) and  BC (-1.4%) round out the three most significant losses. 

Despite falling sales forecast for all provinces, that’s not the case regarding home prices. Average sale prices are expected to grow in New Brunswick (+3.6%) and Nova Scotia (+3.2%), which aren’t substantial price gains. However, they are gains against a period of rising interest rates. 

The bank making a downward revision to falling sales and prices makes sense. Less credit capacity means home prices have to fall to be absorbed by buyers. However, the bank may not be done with downward revisions. 

Despite being recently released, the analysis was based on September data. At that point, they only saw the GoC 5-year bond yield peaking at 4% before falling. Since then, the yield has passed that point, touching as high as 4.48% recently. If the rate doesn’t collapse quickly, they will likely need another adjustment soon.