The Canadian Property Bubble Can Start Deflating As Early As This Month

The Canadian real estate market will change really fast over the next few months. Home prices in the key markets of Toronto and Vancouver saw price growth climb in June. Looking at the most recent data annualized though, a slowdown is just around the corner. Without a sudden boom in prices, the annual trend is likely to begin deceleration as early as this month. This can trigger a big psychological change in the market.

Annualized Growth

Annualizing data is when you take a short period, and project it as though it were the whole year. If you’re analyzing 1-month of data, you’re projecting what a whole year would look like if every month were the same. Today we’re going to look at 3-month annualized data, which is a popular time frame used by central banks. It’s also very popular for credit analysis.

Comparing annualized data is a simple but powerful forecasting tool. The annual (12-month) trend generally can’t fall when the annualized period is higher. Likewise, the annual trend can’t rise for much longer if the annualized trend has plunged below. Every long-term trend starts with a short-term move, and this is one of the ways to measure it. 

Personally, I think annualized growth is most important as a sentiment forecast tool. When people see prices rising for an asset they want, they tend to jump in to avoid having to pay more at a later date. This causes those prices to grow at a faster rate. Similarly, if consumers see prices fall, they tend to hold off on buying to get a better deal. 

This problem is occurring with lumber, where prices are now half the peak of a few months ago. Lumber consumers are waiting for bigger drops because of a fear of overpaying. Annual growth is still huge but try telling that to homebuilders that are saying, “fuck it, I’m waiting.”

It’s a problem seen with almost any good, especially if the buyer can delay. This is why central banks are so worried about low inflation, or even deflation. Slow (or negative) growth isn’t an issue in the short term, but it can change the public’s behavior. The market would rather hoarders than a lack of consumption.

Looking at annualized price growth is useful when trying to benchmark recent performance. It’s also helpful in understanding the probability of future performance. However, its greatest gift is forecasting what people will be looking at in a few months. Then you start to play the game of trying to figure out how they’ll react to that information. That’s another day though, so let’s just get to the annualized growth.

Toronto Real Estate Prices See Growth Slow

Greater Toronto’s 3-month annualized price growth is slowing very fast these days. The rate fell to 11.61% in June, down significantly from the peak of 43.10% in March. The most recent period is seeing about a quarter of the kind of growth seen earlier this year.

More important, the 3-month annualized rate is much lower than the annual price growth. The composite benchmark saw home prices rise 19.92% in June, compared to a year before. It’s only the first month since it’s plunged below, but it was a sharp drop. One that appears to be difficult to reverse.

Toronto Real Estate Composite Benchmark Growth

The 3-month (annualized) and annual rate of price growth for a typical home in Greater Toronto.

Source: CREA; Better Dwelling.

Toronto Home Prices Would Need A Significant Jump To Prevent Deceleration

For Toronto’s annual growth to rise, the 3-month annualized rate needs to climb to 13.09% in July. It doesn’t sound like much, but keep in mind the monthly move needs to be powerful enough to swing 3 months of data.

A rough estimate shows home prices need to rise 1.95% in July alone to prevent deceleration. That’s roughly a $20,500 price increase for the composite. It’s not impossible, but it’s a big change from the $4,500 climb made last month. Especially while some segments produce negative monthly price growth.

Vancouver Real Estate Price Growth Has Slowed  

Greater Vancouver real estate hasn’t haven’t seen annualized growth flip, but it’s falling. Fast. The 3-month annualized rate of growth fell to 16.99% in June. It’s almost cut in half from the 36.44% rate seen in April.

Compared to a year ago, home prices increased at a rate of 14.51% in June. Annual price growth is lower than the 3-month annualized rate of growth. This improves the odds of a slowdown not occurring this month, delaying it. It would still be very difficult to prevent the deceleration trend though.

Vancouver Real Estate Composite Benchmark Growth

The 3-month (annualized) and annual rate of price growth for a typical home in Greater Toronto.

Source: CREA; Better Dwelling.

Vancouver Home Prices Need To Rise A Lot To Prevent Printing Slowdown

The 3-month annualized rate of growth is still higher, but it’s hard to stay relevant after being cut in half. To prevent the rate from falling below the 12-month trend, prices need to rise 2.42% just this month. That works out to a price increase of around $28,400, which… has been done before. It’s just very ambitious.

That’s just to prevent the 3-month trend from falling below the 12-month trend. Preventing annual growth from decelerating seems a little more realistic. Composite prices need to rise 0.61% this month, or about $7,200. Not easy, especially considering last month’s increase was only $2,300. It’s still more realistic though.

Home price growth is still solid, but the rapid slowdown is a kink in the narrative. The industry expects the annual rate to fall in the future, but not this soon. If it happens now, it would be faster and more abruptly than many anticipate. Sudden shifts tend to be less predictable and more choppy than a slow wearing down of buyers.

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  • GTA Landlord 3 years ago

    Agents I know are saying there are two different mindsets in Toronto right now. They see a lot of people putting it off until the reopening, and a big slowdown.

    The buyers that want to buy, really want to buy though. They expect bidding wars and they’re padding their budgets, and asking if they should overbid for places without any other bids. Wild times.

    • Trader Jim 3 years ago

      My group chats have no real estate in it the past couple of weeks. It’s been a little strange. The news has also been void of much talk, except for government announcements to give tax dollars to developers, that suddenly can’t afford to build.

  • Cheryl Boone 3 years ago

    Vancouver is busier than ever. Condos are going in days.

    • Gary 3 years ago

      Vancouver prices increased $700 for condos. That doesn’t even cover the mortgage payment.

  • Van YIMBY 3 years ago

    There’s a need for more homes. Until there’s so many homes that people can’t absorb all of them, you can’t have lower prices though.

    • questions guy 3 years ago

      not true.

      how about interest rates going up – doesn’t that cause prices to drop while adding no supply?

      • John 3 years ago

        I own a farm that can easily fit 300-400 homes on it with room to spare. I have family that is looking for affordable homes to live in but they can’t build on my land even though I offered it for free because of city bylaws. I can’t divide the land or build several houses on it. If the city bylaws were changed the prices would come down fast as developers would develop more land. The best farmland in Fenwick Ontario was trucked away as developers built subdivisions over farms and the farms that were left were brought up by cannabis companies which drove the price up since they don’t have a limit how much they can spend. Now all of the sudden the cities want to protect “farmland”. Farming isn’t the same anymore now you need to be a millionaire to get started and most of your neighbors farms are protected by 24/7 armed guards to protect their “crops”. It is hard to build more homes when you can’t use the land to build or are going into bidding wars with multinational corporations over a piece of land.

        • Omar 3 years ago

          More than enough vacant land in the GTA for all of Ontario’s housing until at least 2035, without the need to upzone any major portions of cities significantly. Just vacant and reallocated industrial.

          That’s not what this is about. Houses in the middle of nowhere are trading for $600k. This is excess credit at work.

        • Sam 3 years ago

          Home owners in places like Toronto are deadly opposed to such idea. They know very well this is the ONLY solution to stabilize the home prices. But they want the prices to skyrocket.

  • sarah 3 years ago

    Buyers who were buying for the sake of the investment, they stopped buying and they monitor the market.

    The ones who buy are mostly the ones who are selling their homes and need to buy a new one. They don’t care about the price increase, because what matters to them is the difference between their old home and the new home price.

    Even many current homeowners who need to change their homes, are waiting for the market to stabilize because they want to buy in peace and in a balanced market.

  • Michael 3 years ago

    The markets in Vancouver and Toronto will plateau in the coming quarter with a small contraction, except in the single family detached category which should continue to eek out small but positive returns. The most overlooked market in % returns in this segment over the coming year is Montreal which will outperform the rest of the country due to affordability and lack of tax intervention for foreign investors who have been migrating east looking for better % returns.

  • questions guy 3 years ago

    can someone comment on the volatility in the chart for 2016? seems to be steeper than today…but prices marched higher

  • Sarah 3 years ago

    One thing I don’t understand…if interest rates go up and thus prices come down, how much will the actual cost to buy real estate change? If I buy a cheaper house but my interest rate is higher, won’t my mortgage payments be comparable to if I buy a more expensive house with a lower interest rate?

    • Trevor 3 years ago

      Yes they will. It’s interesting – mortgage payments haven’t changed much over the last 10 years but housing prices have soared – basically because interest rates have come down.

      If you do buy a cheaper house because of interest rate rise, yes your mortgage payments will be the same BUT you will only owe (for example) 500K instead of 700K.

      As a comparison for every .25 interest rate increase the value of an 800K home needs to decrease by about 25K to have the same mortgage payment

    • BikeMike 3 years ago

      Yes, but your risk decreases.

      • Dundee 3 years ago

        I agree but the mindset of many borrowers today is focused on the payment only. They are “literally renting from the bank”. Mortgages these days are so huge that it may never be conceivable for the average person to pay off in full by the time they retire. The next generation will be so accustomed to not truly owning anything. Subscription services, renting, and leasing will all overtake outright ownership. “they will own nothing and be happy”

    • Mary Reynolds 3 years ago

      Exactly — yes they would be. That’s why so many people are buying now, all over the world
      . If you lock in for five years at something like 1.5 to 1.7 percent, the savings are so great that it’s worth the extra 100,000 dollars on the ticket price. If interest rates ever go up again — say to 8%, which is still historically low, a house may fall 20 to 30% in price and you will pay the same over the length of the mortgage — or more. That’s how this silly game works. There are lots of graphs and calculators that can help you make these calculations more precisely. Try googling “Mortgage amortization calculator.” You will eventually find a good one that is not an ad for a bank.

    • Doomcouver 3 years ago

      Yes, but it encourages much larger down payments as well. Higher interest rates in turn make the economy more recession-resistant because borrowers are forced to have more “skin in the game” as they need to put more of their own money on the line to avoid high interest payments. Less leverage means less risk in a recession. Thus why the economy is seemingly so fragile right now.

      If you could get 80s equivalent prices on housing with 80s interest rates it’s a no-brainer it’s a way better deal than what you’d get today.

  • Mary Reynolds 3 years ago

    Here is a mathematical example. A 1 million dollar mortgage, amortized over 25 years, at a mortgage rate of 5% (historically still very low) would have a monthly payment of $5,845.90. That same house, at a rate of 1.4% (which has been available during the pandemic) has a monthly cost of $3,952.55. That’s a savings of $1893.35 PER MONTH. Or, a savings of $22,720 dollars per year. So over your 5-year term, you would save $113,116 dollars. That’s why it makes sense to pay that extra $100,000 for the house. It costs you the same.
    What a lot of people oddly — to me at least — don’t understand, is that central banks don’t move interest rates to influence mortgages. They move interest rates to stimulate economies during recessions, and to slow down inflation. The mortgage changes are collateral damage, basically. Because COVID will probably (maybe not) wind down soon, inflation should rise and interest rates will rise. House prices would come down, however the buyer will probably pay about the same with the lower priced house over the long term of the mortgage. Here’s a calculator: Have fun.

    • socialbunny 3 years ago

      People do understand, they just disagree. That’s what you don’t understand.

      Paying about the same over a 25 year period means diddly squat. It’s not the mortgage payment people can’t afford, it’s the $150K++ downpayments. I’m paying more on rent than I would on a mortgage…and because I’m doing so it’s hard for me to save a downpayment….which leads to me paying more on rent than I would a mortgage…..which in the end leads to me not wanting to try or having any incentive to work hard because why the heck would I bother if I’m forced to be stuck in this stupid loop? I may as well pack my bags and go abroad. That, as well, is what you don’t understand. Being unable to get a foothold in the economy makes for precarious positions and a fragile society. You don’t want a society full of a lot of young men with no hope. Those don’t end well.

      So yes – banks try to stimulate economies. But if they do so the wrong way, all they’ll do is create more extremism, and that’s exactly what they’ve done. I went 30 years without seeing nazi graffiti in Canada…in the last week I’ve seen 5 different swastikas in 5 different places.

      Remember when everyone was like tRuMp CaNt WiN!! ? Well an angry and forgotten segment of the population proved he could. Indeed that segment even launched an insurrection, though thankfully they were unsuccessful.

      And so we circle back to this idea of people paying the same amount…THAT is why it doesn’t matter. THAT is why people disagree with central bank policy. THAT is why it DOESN’T make sense to pay 100K extra.

      Life is more than the market, but this is something the rich often forget.

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