EconoFACTS

April 14, 2023 | 10:19

Cdn. Existing Home Sales (Mar.) — Laying the Floor?

Economist

Senior Economist and Director
Economics

Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing regional economic, fiscal... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing regional economic, fiscal... (Read more)

Canadian housing activity is still subdued, but a dearth of new listings has tightened the market significantly and set a floor, at least for now, under prices in a number of markets.

Existing home sales rose 1.4% in March (seasonally adjusted), but were still down 34.4% from a year ago. That leaves sales volume still running below the low end of pre-COVID norms, and about 20% below the 10-year average. That said, we’ve now seen back-to-back modest increases, which have also been held back by a lack of new listings (more on that below). The Bank of Canada’s pause messaging stoked an immediate improvement in market psychology (i.e., the worst is over), and a dip in fixed mortgage rates has also helped.

A complete lack of new listings is the big story right now. National new listings fell 5.8% in the month (seasonally adjusted), and the flow is down 30% from last summer. March typically sees a healthy increase in inventory, but this particular month was the weakest for any March in 20 years. For the record, the population back then was 20%, or 8 million people, smaller.

So where are all the listings? Past real estate downturns that have evolved from a fundamental asset price correction into something much worse have come at the hands of forced selling—think the U.S. during the GFC or Southern Ontario in the 1990s. Unsurprisingly, there is none of that today. We’ve covered in other spaces the possible reasons why there is so little selling, but here’s a brief refresher:

Potential sellers don’t want to sell into a down market, and expectations are building that the worst of the correction is over. The Bank of Canada’s guidance has helped establish this improved market psychology.
They don’t have to sell for a number of reasons, including a strong job market and limited mortgage delinquencies.
A major buffer is built into the mortgage market where most of those that took out variable-rate mortgages at 1.5% (now north of 6%) are not facing immediate payment stress because amortizations are instead being stretched out. If payments were rising across the board in real time, we’d probably see many more listings.
OSFI has stress-tested most buyers. Even those that took out mortgages with 1.5% rates at origination, from a federally-regulated institution, were stress tested in the 4.75%-to-5.25% range (and higher as rates rose). Again, no forced selling...households have established an ability to handle these rates.
Investors have a strong rental market to fall back on, even if cash flow dynamics have worsened. Swallow a capital loss or hang on? Many seem to be hanging on.
While some mortgages can be ported, the cost of moving or trading up might be excessive in this rate environment, and many might be holding fort to see how it shakes out.

The stabilization in sales and the lack of new listings has tightened the market balance significantly. The national sales-to-new listings ratio jumped to 63.5% in March, up more than 10 ppts over the past two months and firmly back into tight territory. Across the country, 19 of 26 major markets tracked by CREA now have sales-to-new listings ratio above 60%. The months’ supply of homes on the market also fell again to 3.9 worth—pre-pandemic norms saw about 5 months of inventory on the market.

Against that backdrop, prices are finding a floor. The national benchmark HPI inched up 0.2% in March, stemming 12 consecutive monthly declines. Prices are still down 15.5% from a year ago and 16% from peak levels, but that could be it in this correction. Toronto and the suburbs have led the recent upturn, while markets in Vancouver, Montreal and Alberta are still grinding modestly lower—though most of those markets look to be tightening up as well.

The Bottom Line: We’ve long forecasted a decline in national home prices of about 20%, as higher interest rates clean out the market froth. That asset price adjustment appears largely complete. The next leg of this real estate cycle will be dictated by how well the real economy holds up in the second half of the year, if there is a meaningful upward move in the jobless rate—we suspect that any deterioration will be moderate—and, as always, the path of interest rates. In the meantime, home prices across many markets could be trending stable to modestly higher.

Table 1 - Canada — Existing Home Sales

(% change)

Source: BMO Economics, Haver Analytics, CREA