Canadian real estate is cooling quickly after higher rates derailed its record run. A new research note from BMO shows the national sales to new listings ratio (SNLR) fell in April. The indicator measures supply relative to demand and acts as a leading price indicator. Canadian real estate can expect prices to trial the country’s biggest market, which may see price growth disappear within 3 months, according to BMO.
Canadian Real Estate Markets Have Almost Balanced Inventory
The sale to new listings ratio (SNLR) is a method of determining relative inventory levels. It’s the share of homes sold to the number of newly listed homes for sale. A higher SNLR means tighter inventory levels relative to buying activity.
Data from the Canadian Real Estate Association (CREA) shows a sudden drop in the ratio. The SNLR fell to 66% in April, considerably less than the average of 76% over the past year. It’s a healthy decline, which BMO says is on the “cusp of a balanced market.”
A sudden shift from a hot to balanced market is at the national level—however, the market with the lowest ratio is in Greater Toronto. Surprisingly, one of the world’s biggest real estate bubbles has the weakest relative demand in Canada.
Toronto Real Estate Is Canada’s Biggest Market, and It’s Cooling Fast
Greater Toronto real estate is one of the key markets to watch, suggests BMO. Canada’s biggest real estate market saw its seasonally adjusted SNLR fall to just 45% in April, close to the bottom of a balanced market and getting closer to a buyer’s market. The bank’s research shows the average SNLR over the past 12 months is 70% for the region.
Canadian Home Price Growth Can Disappear Within 3-Months
The industry uses the SNLR to gauge home price growth, and BMO confirmed its accuracy.
“Decades of history show that this ratio is an excellent leading indicator for average transaction prices, leading prices by about three months,” said BMO chief economist Douglas Porter.
“…what the ratio is now telling us is that prices are about to go from 20%+ gains to a sudden stall. And that’s assuming the sales/listings ratio doesn’t fall further in coming months.”
With interest rate hikes only halfway to neutral, the SNLR falling further is likely. Early this week, economists for several financial institutions warned investors the market slowdown is just getting started.