Canada’s real estate industry is a little overenthusiastic about last month’s market data, according to one of the country’s largest banks. A new BMO Capital Markets report explains that weak sales and rising inventory persist, suggesting pricing will remain sluggish in the near term. The bank warned investors that real estate corrections are measured in years, not months.
Canadian Real Estate Demand Suggests Prices To Remain Sluggish
The Canadian real estate industry reported a minor improvement in sales last month. Seasonally adjusted home sales made a monthly climb of 3.5% in May. However, the bank highlights an almost equal increase in new listings (+3.1%), leaving the sales-to-new listings ratio (SNLR) at a similar level.
The SNLR is a fundamental indicator used by the industry to measure relative demand. When the ratio falls below 40% the market is said to be a buyer’s market, where prices are expected to fall. It has a strong historical track record.
“So, unsurprisingly, the key sales/listings ratio barely improved from soft levels. And that suggests pricing will remain sluggish,” explains Douglas Porter, Chief Economist at BMO.
It’s worth noting that these are seasonally adjusted numbers being discussed. While May showed an improvement compared to April, in unadjusted terms home sales were 14% below last year. This indicates the month might be an improvement over April, but sales were worse than last May. But we digress, back to BMO’s take.
Canadian Real Estate Corrections Are Measured In Years, Not Months
CREA, the organization that represents Canadian Realtors, suggested price declines may end soon. Their assumption is based on seasonally adjusted monthly sales rising, and slowing price declines in many markets. BMO argues the SNLR disagrees with that take.
“The accompanying chart [above] smooths out that sales/listings ratio over a three-month period. It’s a good leading indicator for prices, and on that basis, things are still looking south,” explains Porter.
CREA suggests a turnaround may be forming. This was largely based on seasonally adjusted sales rising month-over-month, and price declines shrinking in some regions. If that sounds a little optimistic based on those two indicators, you’re not alone.
“CREA made a point that the decline in prices may be ebbing. That may be correct, but the reality is that they are still ebbing,” notes Porter.
He reminds investors that prices have dropped for five consecutive months, are down over 3% from last year, and 17.5% below the record high hit 3 years ago. It takes a big leap of faith to counter that with a single month’s increase in home sales, and smaller price drops.
“At that time [in 2022], we opined that bear markets in Canadian housing are measured in years, not months. The market balance measures agree,” warns Porter.
How long do Canadian housing corrections last? 🧐 #ToRe #VanRe https://t.co/OwDJIOkjK5 pic.twitter.com/9jwQg4XuYe
— Better Dwelling (@BetterDwelling) May 24, 2022
It’s unclear if Porter is referencing a specific report, but BMO produced a few around the 2022-peak. In one report, they found that historical corrections have taken between 2 and 15 years to run its course, depending on severity. They also specifically noted that Ontario real estate prices resemble the ‘80s bubble, which lasted 6 years from peak. Considering affordability has been stretched to one of the worst levels on record, ending as one of the shortest corrections on record would be surprising.
Took Toronto 22 years to recover its peak in real terms when the early 90s bubble popped, but okay TRREB a few weeks should be good.
Prices are up 80% then correct 17%, so good to go. LOL.
There’s a reason politicians are now just buying investment firms rentals—to keep the real estate industry going.
Normally a correction may last a long time but that’s when we were logical. In a world where the gov is relected after destabilizing a generation, logic is out the window—the inmates are now in charge of the asylum.
The biggest issue with economics is that people are not rational. A model of supply and demand assumes that people will buy when they feel thaf the price offers good value. If prices are too high, people wont buy abd prices will decline.
Now, as we know, real estate has not offered good value for some time. If i boight a house in 2008 in toronto for 450k, and it rose to 1.9M by 2023, that is almost a 500% return in 14yrs. The problem.is that a rational.person would then say, well if the long term increase in housing prices was 5%, a compounded return over 14ys should have been about 100% so 900k. So i woild say, that this has massively overshot its fmv by more than double what its worth.
However, as we have seen with stocks, and other investmebt fads, its hard to argue with a 500% return. So peopke begin to believe ina new paradigm of housing prices. They are ‘investing’ not buying a place to live. Add to this govts who are actively inflating the markets and subsidizing the ceedit risk, and you end up here.
Doug Porter is avsolutely right, if you bought a house in torobto in 1988 at the peak of that market, it wasnt until 2006 that it hit that price again. Much like nortel stock, value is very subjective, and buyers aee rarely well informed as to the risks by professionals. The crea has been predicting a recovery in the market since 2022? Even less effective is the misuse of supply and demand to predict the direction of prices. Nortel had several spurts up on the way from $200 to zero. At thisnpoibt it is too much govt interferrance and excess money creation that is holding up prices. Unemployment, inflation and poor gdp growth will soon force prices down.
I can quibble only slightly with the thrust of the article: This bear market will last decades, not merely years.
Wow. Must be nice to have a crystal ball. Did the ball tell you to buy at the low as well?