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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