It is not by surprise that the increasing interest rates are putting Canada’s housing markets at their low point. In most markets, activity is still much below pre-pandemic levels, and prices have continued to decline since their high earlier this year. The most recent local real estate board reports did reveal some intriguing subtleties, though. In Toronto (and possibly Calgary and Edmonton), the activity decline may be stabilizing, but as of October, it was still in full swing in Montreal (and to a lesser extent, Ottawa). Although it is not certain a sales bump in Vancouver last month signaled a turning point, it might indicate that the rate of correction is slowing down. With reduced rates of depreciation reported in all major markets in October, declining price trends appear to be generally easing.
There is a likelihood that the market will remain generally soft over the upcoming months, regardless of whether the activity is stabilizing, will stabilize shortly, or has already stabilized. Buyers will continue to face enormous challenges as a result of the enormous interest rate hikes so far and the further 25 basis-point increase anticipated from the Bank of Canada by year’s end. If you are planning to be among the buyers you better be ready for that. In a lot of markets, poor affordability is a major barrier that can only be significantly alleviated by lower pricing. Price declines are anticipated to continue through the spring of next year. According to a certain prediction, the national benchmark price will decline by 14% from the (quarterly) peak to the trough.
Toronto area – Low market correction
Despite experiencing some quietness in the last four months, the dramatic downward trend appears to be gaining stability. On a seasonally adjusted basis, home resales between September and October were unchanged (ching up just 0.2% from July’s 62,000 units) (annualized). Demand is currently being restrained by rising interest rates, it is quite evident. They aren’t, however, increasing supplies either. There are currently no signs that rising rates are causing a flood of distressed sales. Following a significant decline this spring, demand-supply conditions seem to be leveling off. Despite the pace beginning to slow down, property prices continue to decline.
In October, the composite MLS HPI fell for the seventh month in a row by 1.1% m/m, which is less than a third less than the 3.4% average monthly decrease from April to August. The index has already dropped 18% (or $237,000) from its peak in March, reversing nearly half of the $504,000 boost it had earlier in the pandemic. The index fell below the level of the prior year in October for the first time in more than three years (by 1.3%). The majority of the depreciation was accounted for by the single-family detached sector (down 3.7% y/y). Condominium prices are holding up better than house prices; their index is still 7.5% higher than it was a year ago. These divergent tendencies are anticipated to continue in the foreseeable future.
Montreal area – Controlled easing ongoing
The recession is not likely to go away. At this point, more buyers are staying away, supplies are growing, and prices are continuing to go down. However, things are not at all dire. Inventory levels are still historically low although rising, and demand and supply circumstances are fairly balanced. Prices are either somewhat higher than they were a year ago or about the same, depending on the metric and region being examined. In any event, they’re still considerably higher than pre-pandemic levels by about 40%.
Shortly, it is expected the market will continue to shrink in a more controlled manner as rising interest rates continue to mount pressure on consumers. As for resale home sales, they are expected to remain poor. However, an estimated 2.6% m/m decline in October might indicate a slowing of the rate of decline. This is a decrease from the preceding three months which had an average of 7%. Additionally, with activity currently at a seven-year low (not including the lockdown period in the spring of 2020), it is believed the bottom may be in reach (early 2023).
Hard times in Vancouver area
Buyers in this area are at the moment facing what can be referred to as very difficult circumstances. Rising interest rates have taken a toll on affordability and significantly put the demand on a downward trajectory. Following a steep decrease of about 44% in activity since March as a result of the Bank of Canada’s hike campaign, the previously extremely tight supply-demand conditions were quickly put to order. Although it is unlikely that this will signal a turning point, it is estimated that home resales increased by more than 10% m/m in October.
Given the severe affordability concerns, we anticipate that activity will remain subdued for a bit longer. Since the peak in April, property values have decreased by 9.2%, with a 0.6% monthly decline in October (based on the MLS HPI). In the foreseeable future, prices are expected to continue to decline, albeit at a slower pace. The fact that the decline in October was the least in the previous five months suggests that.
Is Calgary Canada’s outlier?
Calgary is one of the few markets that are still operating way above pre-pandemic activity levels and it continues to defy the trend in many ways. In October, it is projected that home resales even increased by a little under 5% m/m. Demand and supply balances are still typically tight notwithstanding an increasing trend in inventories. The MLS HPI is down 4.2% since its peak in May, and for that reason, prices haven’t stopped falling, but this has kept the correction in check compared to what has been witnessed in most big cities.
Homebuyers in Calgary have not been exempted from the decrease in purchasing power occasioned by increasing interest rates. In the foreseeable future, it is anticipated that this will keep the pressure on prices declining. Despite this, there is a possibility that Calgary’s real estate values may recover more quickly than those in most other markets. Once interest rates normalize, tight demand-supply conditions will inevitably take the lead in determining price movements. In-migration that is rebounding is also probably to provide a conducive environment for the market.
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