CANADA HOUSING MARKET: SPRING WARMUP?
SUMMARY
Canadian home sales rose 2.3% (sa m/m) in February, despite a whopping 7.9% drop in listings. This month’s pullback in listings combined with a downward revision of the increase in the previous month pushed the sales-to-new listings ratio, an indicator of how tight the market is, to 58.4% — the tightest since last April and above the long-term average of 55.1%. However, the national housing market remained in balanced territory. Months of inventory reversed an easing trend that had been in motion since the fall of 2021, and edged down from 4.2 months in January to 4.1 months in February—a full month below its long-term average, but still a significant improvement from its all-time low of 1.7 months early 2022.
It was a fairly even split between markets that saw sales increase and those where sales declined, while the drop in listings was more widespread. Sales increased in 15 of the 31 local markets we track, with double-digit increases in Vancouver, Victoria, and St. John’s more than offsetting declines elsewhere. On the other hand, above 20% declines in listings in KW, Sudbury, Ottawa, London, and Toronto alongside double-digit declines in other centers dominated the increase witnessed in 9 of the local markets.
As a result, 24 out of the 31 local markets started the year in balanced territory, with 5 markets going back into balanced territory having been in buyers’ territory the previous month.
Prices continued to decline in February albeit at a much slower pace than previously. The composite MLS Home Price Index (HPI) edged down 1.1% (sa m/m), the smallest decline since April 2022, when it started trending downwards. This is also the first time since MLS HPI started trending downward that apartments have led the price declines (-1.5%) rather than the larger single-family homes segment (-1.2). With this month’s decline, the MLS HPI is now 16% below its February 2022 peak, but still 29% above pre-pandemic levels.
IMPLICATIONS
National home sales increased in February, and price declines slowed. While we will abstain from making any conclusions on the stage of the housing market correction based on this single month’s result, this seems to be inline with expectations of activity stabilizing. We will be monitoring the market as we enter the spring season, which should carry more information on the state of Canada’s housing market and signals about expected recovery.
The environment surrounding the housing market is evidently uncertain with the current turbulence in financial markets following the failure of two US banks and sticky US inflation further muddying the outlook for the Canadian and global economies. We remain of the view that the Bank of Canada will keep its policy rate at 4.5%, before gradually cutting rates through 2024 given our forecast of a mild recession this year and slowing inflation, with uncertainties posing significant risks to this rate call.
We still see some room for prices to continue to decline as part of the needed correction due to the lagged impact of higher rates along with government measures that came into effect in January. It is the case however that we believe most of the price declines have already taken place, since financial and borrowing conditions tightened even before the Bank of Canada started hiking early last year, and given the expected easing ahead with our forecast of declining rates through 2024. Despite these expected additional declines, prices are likely to remain above pre-pandemic levels (see here) with unaffordability continuing to be widespread throughout Canada’s housing market. The declines in prices we have seen so far have done little to alleviate unaffordability concerns, as any relief from price declines has been offset by higher mortgage rates. Pent-up demand from both the erosion of affordability up to this point and strong population growth is expected to take hold once borrowing rates decline, pointing to a stabilization in housing market activity and an eventual uptick in demand and prices. This, if not accompanied with sustained improvements on the supply front, will lead to a deterioration in affordability.
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