Canada

The Canadian Property Bubble Just Saw A Leading Price Indicator Show The Top Is Near

Canadian real estate prices may be hitting peak growth soon… if a leading indicator continues to hold true. The sales to new listings ratio (SNLR) finally peaked at an absurdly high level, and has since made a sharp drop. The ratio, used as a measure of inventory absorption, has a track record of leading price growth. If the relationship continues, this means peak price growth is near, if not already here. Let’s take a look at the numbers and their relationship with three of the country’s key markets.

The SNLR For Canadian Real Estate Peaked In January

At the national level, price growth tends to peak shortly after the SNLR. Since 2005, the annual rate of price growth peaked between 2 to 6 months after the SNLR. If January was the SNLR peak, then price growth may follow between March and July, if the pattern holds. Not a stretch to see that happening, considering annual price growth was 23% in April.

Canadian SNLR vs Annual Price Growth

The sales to new listings ratio (SNLR) compared to the annual rate of benchmark price growth, for composite homes across Canada.

Source: CREA; Better Dwelling.

Historically, the SNLR rising from its lowest point, takes price acceleration a little longer to follow. After the SNLR hit the lowest point, annual price growth hit its lowest point between 5 and 10 months afterwards. Price growth deceleration is more sensitive to the SNLR than it is for acceleration. In other words, people accept a top more quickly than they accept a bottom.

SNLR For Toronto Real Estate Has Led Price Growth By 2 To 6 Months

We’ve taken a deeper dive into the Toronto SNLR, but let’s save you a click, and run over the important parts. The annual rate of price growth has peaked between 2 to 6 months after the SNLR. If the current January peak sticks, that would put price growth peaking between March and July as well.

We can also see that negative price growth can occur without the SNLR reaching a sellers’ market. In other words, it confirms that generic SNLR ratios are only guidelines. Each market has its own ratio, with more liquid markets tending to have tighter ratios at all times. Toronto’s balanced market ratio can act like a buyers’ market in other regions.

Toronto SNLR vs Annual Price Growth

The sales to new listings ratio (SNLR) compared to the annual rate of benchmark price growth, for composite homes across Toronto.

Source: CREA; Better Dwelling.

Price growth recovery has taken a little longer to follow the SNLR. After the SNLR bottomed, price growth took between 3 to 11 months to follow. What’s interesting is Toronto hasn’t had a significant price correction since the early 90s. Since 2005 though, price growth has taken longer and longer to recover. In 2009, the bottom took 3 months. Then in 2010 it took 7 months, and in 2017 it took 11 months. I don’t know if that means the next one may take longer, but there are a few reasons to believe it may.

Vancouver Real Estate Takes Longer To Respond To A Falling SNLR

Vancouver real estate appears to take a little longer to respond to the collapse of peak SNLR. Since 2005, the annual rate of price growth has peaked 8 to 12 months after the SNLR. If peak SNLR sticks, price growth would follow between November and February 2022. That may seem like forever, but it’s not really for an asset that takes 25 years to pay off.

Vancouver SNLR vs Annual Price Growth

The sales to new listings ratio (SNLR) compared to the annual rate of benchmark price growth, for composite homes across Vancouver.

Source: CREA; Better Dwelling.

Recovery has been faster for Greater Vancouver over the past couple of decades. After the SNLR bottomed, annual price growth followed 4 to 9 months afterward. Price growth is a little slower than Toronto or the national indicator. Price acceleration is much faster than it is to the collapse of peak growth.

Does this mean the market is going to “crash?” No, we only looked at the SNLR over the period of the benchmark composite for home prices. The benchmark only covers 15 years of price data, which haven’t seen a big correction. Markets like Toronto only hit their 1990s inflation-adjusted peak in the 2010s. It shouldn’t be a surprise no large corrections have occurred since then.

So what does it mean? The prices may have reached the point where there’s a greater incentive to sell than buy. This often means price growth is near its peak, when the market finds it difficult to find enough qualified buyers. You know, when Wile E Coyote used to run over the edge of a cliff, but wouldn’t drop until they looked down? It’s kind of like that.

It’s important to understand this time is different, and not in the way most people have been saying. Home prices in Canada’s major cities have increased multiples of household incomes in just one year. Even a very large correction would struggle to bring Toronto and Vancouver markets back to affordable. At least in a relatively short-period of time.

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20 Comments

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  • Lou Chao 4 months ago

    Even CREA said prices will pull back some of the gains. The only people saying otherwise are the greasiest of agents.

    • Ian Brown 4 months ago

      In one corner, the BoC, CREA, every bank, every risk analysis firm, most real estate developers calling lower prices by year end.

      In the other corner, we have a couple of the greasiest of agents on TV that flip flop between “it’s a bubble” and “it only goes up” depending on how people feel on Reddit, and a few construction workers making more flipping homes than they do at their work.

      Hm…

    • V 4 months ago

      Who? Al Sincair? You mean prices won’t keep going up?
      I shouldn’t come in “hard and heavy” and overpay by 100’s of thousands like Al says on cp24?

  • Omar 4 months ago

    Didn’t you hear? Prices are going to rise by $200k per year forever. Even if no one can afford it, prices will just keep growing according to academics in the news. No one needs to buy the new inventory, it just keeps going up apparently.

    • Trader Jim 4 months ago

      It’s so cringe to hear academics try to justify 40% growth in prices. There’s literally no rationale that says a + b = 40% more. It’s entirely emotion-driven.

  • Joe B 4 months ago

    Who cares. At this point the market needs a complete implosion rather than a pull back to restore affordability and undo the mess that’s been created.

    • Trader Jim 4 months ago

      Agreed, but an implosion starts with a pull back and disbelief. Just like inflation getting out of control always starts with transitory statements to manage the budget.

  • Ryan 4 months ago

    I threw in the towel, and just moved to the US during the pandemic. Packed up a car, and took off.

    A detached home in Vancouver is now $2.4 million, , which meant our household incomes would barely quality with a $480,000 down payment, and a $350k/year in income. That’s if they play with the debt service ratio to make it work. That’s not even a nice house, but basically a tear down.

    The sign should have been when a friend that’s a doctor became a real estate agent.

    • Trader Jim 4 months ago

      If you didn’t buy a house 10 years ago, you need to be one of the absolute wealthiest in the country, or have parents that borrow their home equity to help you think you are.

      Zero chance would I be in Canada if I was starting out. I have employees that make well into the six figures, that are struggling to figure out anything but a condo.

  • Felix 4 months ago

    The brutal cold of Toronto, or the sunshine of LA with higher pay and more affordable housing. Let me sit on that, and get back. LOL

  • Christopher Barclay 4 months ago

    The Federal government knows this has spun completely out of control, and are quietly ignoring it while tightening credit to minimize the downturn. No one wants to be the cause of the downturn, which is why they announced nothing.

    They just don’t want to be blamed for the pin pop.

    • Jason Chau 4 months ago

      Or more likely the Federal government is waiting to trigger a fall election, knowing they’ll win a majority when everyone is high on home equity and a reopened economy. Then they’ll follow it with house price cooling measures.

    • Joe B 4 months ago

      Agreed that they know and don’t want any blame, but disagree that minor credit tightening will pop it. I have a hard time believing that alone will trigger the implosion needed to fix this mess. I hope I’m wrong.

  • Rob 4 months ago

    Adam Vaughn : Hold my beer, I’ve got this.

  • Elon 4 months ago

    the year is 2030, average home prices in Canada reached $3m. Better Dwelling warns they can see the top!

    • Kyle 4 months ago

      Small correction.

      The year is 2021: BMO, RBC, Scotiabank, CREA, Bank of Canada, TRREB, REBGV, Moody’s, Veritas, and Better Dwelling think the price is near the top.

      Some guy that could barely pass high school math think people can buy homes 30 times their income? “It can go der da moonz, my condo is worth more than I can ever make at work!”

    • Average Man 4 months ago

      If that were to become the case, and it might, it would come with a side of re-ordering Canadian society and it would be hella ugly.

    • SH 4 months ago

      The only way that happens is if Canada ceases to be a democracy.

      It is impossible for Canada to remain democratic amidst such blatant inequality. The middle and working classes will eventually vote in people who actually do something (or rather, STOP doing things, i.e. supporting the realtor/housing industry).

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