November 15, 2023 | 10:35
Canadian Home Sales — Fall Headwinds
Canadian housing activity softened further into the fall season, with sales down, plenty of resale supply, and prices moving lower across much of the country. The past month's bond-market rally offers a glimmer that we could get some mortgage rate relief, but we continue see tough conditions into 2024.
Existing home sales fell 5.6% in October (seasonally adjusted) and were up a very modest 0.9% from year-ago levels. Current activity might feel dead silent compared to the demand exuberance in 2021 and early-2022, but current sales volumes are still in-line with pre-COVID norms, albeit at the very low end of that range.
Meantime, new listings dipped 2.3% in October, the first move down after rising briskly for six consecutive months, but they remain up a solid 16% from a year ago. The level of new listings flow is running at the higher end of the pre-COVID range and, with sales at the sluggish end, supply on the market continues to gradually build. The sales-to-new listings ratio fell again to 49.5%, down from as high as 68% in April. For comparison, the 10-year average is 61%, and these latest results are encroaching on the lowest (i.e., softest) readings since the 2009 recession. Meantime, the months’ supply of homes available at the current sales pace stepped up further to 4.1 (a few ticks below the past-decade average); and the same ratio in Ontario (3.8) has now jumped to the highest since 2014 (April 2020 shutdown excluded). For what it’s worth, that long pre-dates any serious talk about supply shortages.
These dynamics are pulling prices down further, with the national benchmark falling 0.8% in October (8.9% annualized and seasonally adjusted). From a year ago, the benchmark is still up 1.1% as the market was sliding more sharply through 2022, while the average transactions price was up 2.0% y/y.
Notable Regional/Segment Trends
Calgary still looks like the strongest market in Canada. The market balance has eased meaningfully, but a 72% sales-to-new listings ratio still tilts in favour of sellers and is driving price gains. The benchmark price is now up 9.4% y/y to a record high. A record high, you say? Yes, but still less than half the price of Toronto for a single-family home—hence why people continue to move there.
Speaking of Toronto, conditions remain very soft, and we haven’t seen a market balance this weak since the height of the financial crisis. In fact, today’s sales-to-new listings ratio (34.5%) is not far off the 33.6% low set in 2008. In the latest three months, the benchmark price has fallen at a 12.2% annualized pace. These tough and soggy conditions extend across most of Southern Ontario as well.
Montreal is holding up very well with prices mostly flat in recent months and only 3% off record levels, as the market balance has not turned nearly as dramatically as in Ontario. Ditto for Vancouver where the market is holding up much better.
Atlantic Canada, like Alberta, is also drawing in large inflows as affordability is relatively attractive, so it’s no surprise that markets like Moncton, Halifax and parts of PEI and Newfoundland & Labrador are still tight. Most of the region is still in sellers’ market territory, while prices are at or near cycle highs.
Canada wide, single-detached prices have stepped down more quickly in recent months than in the condo sector, but from a year ago, both are up just under 2%. Single-detached in expensive markets are clearly vulnerable to immediate affordability stress posed by high mortgage rates, and that’s probably why that market is adjusting faster at the moment. But, from a supply/demand perspective, the current and future pipeline of resale condo inventory looks pretty rich, while single-detached supply remains constrained in major markets. As many of the (record) 273k apartment units under construction right now come to completion in a tougher market environment, we could see the balance shift.
Bottom Line and Outlook
Ample listings, restrictive mortgage rates, very little investor demand and a subdued economic outlook all suggest tough market conditions will continue. We believe prices are now in another leg lower that could run through around the middle of 2024, depending how the economy and mortgage rate backdrop evolve. Interestingly, the heated rally in the Treasury market over the past month has also pulled down Canadian yields, which should take at least some stress off the market. Note that the 5-year GoC yield is now down almost 60 bps from the early-October high. While that’s still about 100 bps higher than at the March low (which helped the market bounce in the spring), some easing in financial conditions should help the market breathe a bit easier.