EconoFACTS

April 12, 2024 | 09:52

Cdn. Existing Home Sales (Mar.) — Near a Tiffing Point?

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Canadian housing activity was largely stable in March, but a key spring selling season lies ahead. Existing home sales edged up 0.5% in March (seasonally adjusted) and were up a modest 1.7% from sluggish year-ago levels (although an early Easter long weekend likely reduced volumes somewhat). While current activity might seem quiet compared to the exuberance in 2021 and early 2022, sales volumes are trending about in line with pre-COVID norms, albeit at the low end of that range.

Meantime, new listings dipped 1.6% in March, but were still 10.1% above levels seen a year ago. The sales-to-new listings ratio rose slightly to 57.4%, which leaves the market squarely in balanced territory—the 10-year average is 61%, and these latest readings are consistent with very flat price trends. The months’ supply of homes available at the current sales pace held steady a 3.8, which represents a market still looking for listings (the 10-year average is 4.4).

These dynamics are still pulling prices down, but the negative momentum is easing. The national benchmark HPI was down 0.3% in March (3.6% annualized); it was down 5.7% annualized over the latest three months; and 8.2% over the latest six months. From a year ago, prices are up 1.1%, so this pattern reflects the second correction that began last summer.

Some significant regional disparities continue to build. Calgary is still the strongest larger market in Canada, with the sales-to-new listings ratio now pushing above 100% (all listings are clearing within the month), and prices now up 11% y/y to new record highs. Vancouver and Toronto remain largely balanced (stronger conditions in single-detached versus condos); Montreal’s market is nudging into sellers’ territory; and much of Atlantic Canada is still firm. Most of the softness remains concentrated around Southern Ontario.

Here are some key thoughts and themes heading into the spring selling season:

Eyes on the BoC: The Bank of Canada left rates unchanged on April 10^th, as fully expected, and the door remains open for a rate cut by June/July, with the next two CPI reports to prove critical. That said, the amount of easing might be limited by much tougher U.S. inflation trends. The market is currently pricing in just over two rate cuts in 2024, which would be far short of the relief many were hoping for coming into 2024.

Little affordability relief this year: Five-year fixed rates are generally the lowest available on offer in Canada, so as the Bank of Canada (eventually) cuts rates, the affordability impact will be initially limited since variable rates are well above fixed. As such, actual affordability and qualifying amounts are still going to be in tough for a while, especially with 5-year GoC yields now up roughly 50 bps from the late-December lows.

Mind games: Let’s just say that if the BoC doesn’t cut rates soon, many in the real estate market are going to be seriously disappointed. A few interesting measures of market psychology are playing out now that suggest BoC rate-cut expectations are rooting. First, Bloomberg/Nanos survey data show that market sentiment has improved meaningfully in recent months. Net expectations for home price growth over the next six months have improved to the highest share since mid-2022—sentiment pivots have clearly been triggered by the BoC during this cycle. At the same time, we’ve witnessed an uptick in variable-rate mortgage originations, to 20% of new activity in the latest two months from less than 5% during the summer. That’s despite as much as a 150 bp premium in variable rates over five-year fixed—fewer and fewer want to lock in with rate cuts presumably looming, and/or they're discounting improved affordability ahead.

Ottawa eying amortizations: Canada announced a few new housing affordability measures ahead of the federal budget, including an extension to 30-yr. amortizations for first-time buyers of a new build, with an insured mortgage. We don’t have a precise estimate on the share of housing activity that this will cover, but suffice it to say that the policy change drills down into a very small segment. As for affordability in this sliver of the market, a switch from 25 to 30-year amortization will add about 8% to buying power at a 5% mortgage rate with a fixed down payment. This could shift some incremental activity toward new builds among first-time buyers (until prices adjust), but the overall market impact should be limited. A more notable change might be one that still lacks details, as Ottawa also says that it will push for permanent amortization relief for existing homeowners that meet specific eligibility criteria—think those that have extended out to dampen the impact of higher rates.

Table 1 - Canada — Existing Home Sales

(% change)

Source: BMO Economics, Haver Analytics, CREA