September 15, 2023 | 10:14
Canadian Existing Home Sales (Aug.) — Chilly Before the Pause
Canadian housing activity is winding down a sluggish summer, with sales and prices losing momentum after the Bank of Canada resumed its rate-hike campaign before pausing again on September 6th.
Existing home sales fell 4.1% in August (seasonally adjusted), but were still up 5.3% from weak year-ago levels when the market was well into correction mode. Meantime, new listings rose 0.8% (+5.5% y/y) in a fifth consecutive month of solid seasonally-adjusted flows. After a dearth of new listings earlier this year helped lift prices off the floor, supply is now coming to market at a rate in-line with historical norms again. That, combined with sluggish sales, continues to soften the market balance in a meaningful way. The sales-to-new listings ratio fell to 56.2% in August, down from as high as 67% in April. This reflects balanced conditions now a few notches below the 10-year average.
As a result, price momentum has slowed after rebounding strongly through the spring. The MLS Home Price Index rose 0.4% in August, another step down from gains of nearly 2% per month seen through the spring. From a year ago, the benchmark price was up a modest 0.4% (the comparison is getting easier), while the average transactions price rose 2.1%. From peak early-2022 levels, the benchmark price is still down 9.4%, but has now rebounded just over 7% from the March 2023 low.
Looking across the country, we’re now seeing some clear regional discrepancies after a period where most markets were moving largely in synch. Calgary remains the strongest market in Canada, and it’s not really close. The sales-to-new listings ratio there is running at a hot 82.4%, and prices have now rebounded more than 6% above the 2022 pre-correction high (Calgary’s correction was also among the most modest in the country). Don’t call us surprised. At the same time, prices in Atlantic Canada are looking firm, with a few markets now seeing levels above those at the 2022 high. What do these regions have in common? Relative affordability and net provincial migration inflows that are supplementing international immigration. Translation: People are moving there because they can live affordably.
At the other end of the spectrum, Southwestern Ontario continues to struggle with the deepest correction, still down more than 15% in some cities. Toronto has made up some ground recently, now down less than 10% from last February. Oh, and cottage country—still not looking good.
The Bigger Picture
The Bank of Canada’s September 6th pause will help market psychology, and we wouldn’t fully write off this market given underlying demographic demand, but there are a few reasons why this pause might not provide the same burst it did in the spring:
First, there has been some noticeable softening in the job market from early in the year. The unemployment rate is now up 0.6 ppts from last year's lows, and vacancies have fallen by more than 230k from a year ago. This is not yet a ‘soft’ job market by any means, and wage growth is still sturdy, but there might be a little fraying around the edges.
Meantime, there are more listings coming to market. National seasonally-adjusted new listings in March were the lowest since 2003, despite eight million more people in Canada. The tightening of the market was as much a result of less supply as it was buyers coming back into the market. The short takeaway was that homeowners didn’t want to, or have to, sell into a down market. Now, however, listing flow is a lot stronger, tracking about in line with pre-COVID norms. There are also a record number of housing units under construction that will continue toward completion, some of which will be flipped onto the resale market. And, pressure from mortgage renewals continues to build. Based on Bank of Canada calculations, about 35% of mortgages had been subject to renewal as of mid-2023 relative to the start of 2022. That share will increase to almost 50% by the turn of the year, then to 65% by the end of 2024. And, our simulations show that the payment shock is becoming more severe the deeper into the renewal cycle we go.
Perhaps the most important factor is that there is no mortgage rate relief coming alongside the Bank’s pause. Back in the spring, the market was actively expecting a recession and pricing in Fed and Bank of Canada rate cuts in the second half of the year. Both two and five-year GoC yields were down more than 60 bps from the start of the year by March, and that translated into shorter-term fixed mortgage rates falling comfortably below 5%. Not this time. Both yields are barely off their 16-year highs, and the Bank’s still-hawkish talk helped keep the market from rallying. That leaves the lowest available mortgage rate today (typically 5-year fixed) about 100 bps higher than the lowest that was available (2-3 year fixed) in the spring.
We all know that it’s hard to keep this market down, but the headwinds are stiffer than they were the last time the Bank of Canada stepped aside.