Canadian real estate prices are back to climbing aggressively just over a year after the correction began. Canadian Real Estate Association (CREA) data shows the price of a composite benchmark, or typical, home surged in April 2023. The unusually large increase observed also happens to be similar in size to increased leverage from falling mortgage rates. This begged one of the country’s largest banks to ponder, is monetary policy still too loose?
Canadian Home Prices Climbed $17k In A Month
Canadian residential real estate prices are back to surging higher. The composite benchmark climbed 2.3% (+$16,900) to $744,600 in April. The month marks the third consecutive increase, with only a handful of markets seeing a pullback.
It’s likely hard for most to appreciate the size of these numbers. For context, home prices across the country climbed more than a quarter of the median gross annual income of a Canadian, in just one month. If this persisted at this rate, home prices would double within 3 years and a mortgage for a typical home across the country would only be attainable by fewer than 1% of the population.
Growth at a rate this high is unlikely to persist for long, but it feels important to highlight the current market’s exuberance only a year after prices began to pullback.
Canadian Real Estate Prices
The price of a typical home across Canada, in Canadian dollars.
Source: CREA; Better Dwelling.
Canadian Real Estate Prices Are Still Significantly Below All-Time Highs
Just three consecutive months of growth doesn’t establish a new trend (yet), but annual growth is improving. The national benchmark is still down 12.3% (-$104,500) from the same month last year, but off the biggest annual drop on record.
Canadian Real Estate Price Growth
The 12-month change in Canada’s benchmark home price.
Source: CREA; Better Dwelling.
A Perfect Storm of Rising Sales, Falling Inventory, and Rising Mortgage Leverage
Home sales remain historically weak, but improved from last year’s lows. At the same time, new listings of homes for sale have pulled back, leaving the sales to new listings ratio (SNLR) at just 70% in April. That’s a very tight market, where home prices are expected to climb.
“The snapback in sales, the firming in prices, and the bounce in starts in April all suggest that the housing market has found a floor,” said Douglas Porter, a senior economist with BMO.
He doesn’t think markets improving after the Bank of Canada “pause” announcement is a coincidence, adding, “Some clarity on the interest rate front has no doubt played a major role, as has the underlying resiliency of the economy itself (highlighted by the persistent strength in jobs).”
A Big Six Bank Is Pondering If Monetary Policy Is Still Too Loose
Even with tight demand, home prices climbed at an usually fast rate last month. Earlier this month, we reported that home prices also climbed in Toronto (+2.4%) and Vancouver (+2.4%) at an unusually fast, but similar rate. It turns out the increase is just under the sharp mortgage leverage increase observed in fixed rates, adding roughly 2.6% leverage in April.
It’s not a coincidence. As stated, a BoC study revealed that over a 30-year period, Canadians adjust their budget to pay a similar amount as rates fall. Falling interest rates didn’t provide relief, but the increased leverage is being added to the price of a home.
When combined with tight inventory and state-limited risk, it’s easy to see why Canadians have done this. Most people are just seeing massive wealth increases, and state-assisted relief when risk appears.
BMO made a similar credit-related observation this morning. “As we have often pointed out, if housing—the most interest-sensitive and cyclical sector of the economy—is showing a renewed pulse, it begs the question of whether monetary policy is nearly tight enough,” said Porter.
“While we don’t look for further rate hikes by the Bank of Canada, renewed strength in housing certainly aims the risks squarely in that direction.”
Remember the band kept playing as the Titanic was sinking. So to keep everyone calm so as not to panic. There you go.
bingo….this will not end well
Recently we red here that mayors of Canadian cities do not qualify for a mortgage for an average house in their cities (e.g Toronto mayor with $260K income). The banks claim that 30% of all mortgages are growing since people can not afford even interest payments. If you calculate the mortgage payments, house is not a profitable investment even with 30% down payment (e.g. with 500K down on house of $1.5M in Toronto, the rent would have to be in excess of $7000 to break even, vs $25K profit if you just deposit the 500K in the bank). And yet they go like hotcakes. So who is buying them?