Canadian real estate markets are losing some steam after its record year. Canadian Real Estate Association (CREA) data shows just over half of markets saw price growth slow in June. Looking more closely at recent numbers reveals this trend is about to become more common. All but a few markets are currently on track for price growth to slow down over the next few weeks.
Annualized 3-Month Growth and Forecasting
Today we’ll be looking at the annualized 3-month price growth for various markets. Analysts, especially in credit or at the BoC, use this measure to compare performance. What we’re doing is measuring the change over a 3-month period, and projecting it as though it were the whole year. This allows for a straightforward comparison of the 12-month, or annual, rate of growth.
Trends don’t just abruptly change direction, even though that’s how they may be reported. Every movement starts with a small shift, and the 3-month rate shows it first. If the 3-month trend falls below the 12-month trend, it provides a drag on annual growth. The longer the short-term trend is below the long-term trend, the more it drags it lower. Which makes sense, because higher-performing older months get dropped in the comparison.
It works the same in the opposite direction as well. If the 3-month trend rises above the 12-month trend, it drags the annual rate higher. Annual growth can’t grow if the 3-month rate hasn’t been above the 12-month trend in a while. That would be like getting Cs on all your homework, tests, and exams — then expecting an A grade. It happens, but the data needs to be manipulated manually at the institution level. Outside of that, it doesn’t make sense.
Over Half of Canadian Real Estate Markets Are Showing Annual Price Deceleration
First, let’s look at which markets have seen annual price deceleration already. Annual growth in 27 markets decelerated in June, representing 56.3% of the CREA HPI. Sharp changes were seen in Woodstock (-9.3 points), North Bay (-4.8 points), and London-St. Thomas (-4.7 points). These markets have grown at such an absurd rate recently, local agents likely haven’t noticed.
Canadian Real Estate Price Growth
The 3-month (annualized) and 12-month rate of price growth for the composite benchmark home in various Canadian real estate markets.
Source: CREA; Better Dwelling.
Much more markets are preparing for a slowdown though. The 3-month growth (annualized) dipped below the 12-month trend in 35 markets in June. That’s about 3 in 4 markets (72.9%) where price growth has been slowing recently. This will drag annual growth lower if there isn’t a sudden boom to push prices higher.
… but let’s be honest, we’d all love to see what a credit boom looks like when mortgage debt is at this level. It’s already growing at the fastest rate since just before the Great Recession.
Canadian Real Estate Prices Showed Acceleration In A Handful of Markets
Not all Canadian real estate markets are slower. Let’s start with the annual rate of growth. Annual growth in 21 markets accelerated in June. This means the annual rate reported in June was higher than the previous month. Notable increases were in Bancroft (+6.5 points), Vancouver Island (+4.1 points), and Greater Moncton (+3.3 points). Though some of this is momentum since a lot fewer markets saw their 3-month trend accelerate.
The 3-month trend shows very few markets have seen an acceleration recently. Only six markets show 3-month annualized growth in June as higher than a month before. The other 42 markets (87%) show June was slower than the month before. Only 13 markets have a 3-month trend above their respective annual growth. If there’s steam left in this market, it hasn’t appeared yet.
Canadian Real Estate Price Growth Momentum
The percentage point difference between the 3-month (annualized) and 12-month rate of growth. A positive number means recent growth has been high relative to the past year. A negative number means recent growth has been low, relative to the past year.
Source: CREA; Better Dwelling.
Canadian real estate prices are slowing in growth, and it’s become obvious in some markets. Home sales peaked in January, and have generally been falling faster than inventory. Price growth slowing as a market fundamental changes, is definitely healthy to see.
Now the big question is how much will the market slow? If it doesn’t slow enough, shacks in the woods can become more expensive than a penthouse in Toronto. Not very likely, but I’ve seen stranger things over the past few years… like shacks in the woods trading for almost as much as a penthouse in Toronto.
It would be difficult to see the market not giving back some of the gains made over the past year. Home prices in many markets climbed due to user premiums during the pandemic. If someone pays a premium due to ideal use during a pandemic, does that stick post-pandemic? No one knows at this point, but I’m sure we’ll find out soon. It all starts with a change in the direction of a trend.
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