March 15, 2022 | 10:01
Canadian Existing Home Sales, Housing Starts (Feb.) — Interest Rate Test Awaits
Canadian existing home sales rose 4.6% in seasonally-adjusted terms in February (-8.2% y/y), as demand remained ferocious ahead of Bank of Canada interest rate liftoff in early March. We'll just reiterate, yet again, that it is demand that is off the charts, with February's sales level sitting roughly 35% above pre-COVID norms.
New listings came to market at a strong pace for the middle of winter, with seasonally-adjusted listings jumping 23.7% in the month. That actually helped improve the market balance, with the sales-to-new listings ratio pulling back to 75.3%, from 89% in the prior month. That's still a very, very, tight market, but could be a preview of how quickly the balance can change when sentiment changes.
Consider that demand has been boosted by expectations of rising prices and a last-ditch effort to lock in cycle-low mortgage rates, while supply has likley been held back by those same price expectations (why list today when you get 10% more tomorrow?). Sentiment can change in a hurry, and this market could find balance very quickly the moment that it senses softer prices. But we're not there yet, as the standing inventory sat at just 1.6 months' worth at the current sales pace, holding at a record low.
Against that backdrop, prices continued to surge in February, with the MLS HPI up 3.5%, the strongest monthly gain on record. That blows through the pace seen a year ago, and also the fastest clip of the early-2017 period. That leaves national price growth at 29.2% y/y; 39.5% annualized over the past six months; and 44% annualized over the past three months.
Here's the thing: We've long been sympathetic to some of the issues on the supply side. But, when prices are going parabolic at a near-50% annualized clip, expectations have rooted, investors are driving most of the incremental demand, and Canadians are buying pre-sale condos halfway across the country, those longer-term issues become somewhat trivial.
Regional highlight: Calgary's market has exploded to the upside, with the benchmark price up 34.6% annualized over the past three months, the fastest clip since the heady days of 2006. Relative affordability and $100 oil have clearly turned investors to that market.
Sector highlight: Condos have come back with force. In Toronto, condo prices are up more than 44% annualized over the past three months, still trailing single-detached (+59.3%), but not by much any longer.
In a separate release, Canadian housing starts rose to 247,300 annualized units in February. While winter months and seasonal adjustment can really swing an indicator like new starts, the reality is that homebuilding activity in Canada has never been more robust. The 12-month average for starts sits at 268k units, just down from record levels set late last year. The number of homes under construction now tops 300k, a historic high by a long shot. And, the same holds true after adjusting for the population size. That said, composition issues on the supply side persist: There are currently six apartment units under construction for every single-detached house being built in Canada, at a time when millennial demand for space is coming into its peak.
The Bottom Line: The Canadian housing market is running headlong into higher interest rates, and the next few months could be telling. Fundamentally, it will still take a number of months for variable rates to rise enough to bite, and for low-rate pre-approvals to roll off. But, sentiment can change in a hurry.