Canadian real estate sales and prices are collapsing, experts warn it’s only just begun


The Canadian real estate boom is dead and experts see an inevitable correction. Data from the Canadian Real Estate Association (CREA) shows home sales fell in April. Higher mortgage rates and unsustainable prices have vaporized demand as markets adjust. As significant as the fall in demand was last month, economists believe we are just getting started.

Canadian real estate sales are down 21%

Canadian home sales have slowed but turned a sharp turn last month. Seasonally adjusted home sales fell 12.6% in April and were 21% below last year’s record high. The drop in home sales in Toronto, the country’s largest market, was a major contributor. But 80% of the markets saw a decline in selling, so this is a general problem probably due to a breakdown of a speculative mindset.

Monthly home sales in Canada

Monthly sales of existing homes via the MLS.

Source: CREA; Live better.

Canadian real estate sales and price drops are just beginning, warns BMO

Canadian interest rates have hit record lows, but home sales continue to fall. It is too early for interest rates to have already strangled borrowing, except in a bubble. In a bubble, buyers are driven by emotion and pay an emotional premium. The credit throttling takes 18-24 months, but the emotion throttling only takes a few moments. In this case, higher interest rates seem to have broken the speculative mindset.

Home sales in Canada: annual growth

The 12-month change in home sales in Canada.

Source: CREA; Live better.

“Canada’s housing demand fever has erupted and, who would have thought, all it took was a nudge in interest rates from the Bank of Canada to change sentiment,” joked the senior economist at BMO, Robert Kavcic. Over the past year, he has argued that this was a case of speculative demand and not a shortage of supply.

“When we talk about housing correction, it’s not a question of if, but where, how much and for how long?” he explained.

BMO warns that Ontario’s suburban market is the most “unstable” and particularly vulnerable. Markets with less exuberant valuations will hold up better, they suggest. However, “… soaring mortgage rates will still be hard to bear,” they warned the bank’s investor clients.

How much will the prices go down? “Let’s say we’re just getting started,” he warns.

The overnight rate has only risen 75 basis points (bps) and things are starting to slow down. It’s already hitting buyer psychology, BMO says, and the higher rates have only just begun. The bank expects a further hike of 100 basis points by the end of July and another 125 basis points by the end of the year.

“That effectively means the market will move from a mortgage rate of around 1.5% to somewhere in the range of 3.75% to 4.5%, depending on how bond yields move,” he said. he warned.

How long the correction takes will depend on the economy and the slowdown in inflation. According to Kavcic’s research, home prices take 2-3 years to bottom out and 4-5 years to get back to where they were. This timeline is in line with forecasts shared by Capital Economics last week.

RBC welcomes a housing correction, but not a meltdown

RBC also sees housing demand cooling across Canada and called it a “welcome correction…”. The bank explained that the market has passed its peak and should continue to calm down over the next few months.

“We believe the significant decline in activity in April marks a turning point for the Canadian market with further cooling underway,” said RBC senior economist Robert Hogue.

“Having the Bank of Canada embark on an aggressive monetary policy normalization is a game-changer for the market, turning what has been a huge tailwind into a headwind for the market.

Canadian real estate is on track for a ‘sustained cooling’, warns Desjardins

Still not convinced? Desjardins is also seeing a slowdown in sales and prices in Canada. The financial institution also attributes the slowdown to the normalization of monetary policy. As rates rise, this will cool the excess demand seen recently.

“If the drop in sales and prices of existing homes in April is any indication, we appear to be on track for a sustained cooling in the Canadian housing market due to rising borrowing costs,” said Randall Bartlett, senior director of the Canadian economy at Desjardins.

They also see the trend is just beginning. “With further interest rate hikes expected and some markets in cities and towns continuing to be well outside of balanced territory, we expect we have not seen an end to market weakness in the US. habitation in Canada,” he said.

Low interest rates have sent Canadian housing demand and prices soaring. Cheap silver basically flooded the market to drive the record level of demand. As high inflation forces interest rates to strip stimulus, demand is vaporized. This helps restore balance in the market as investors step back and consider whether this is a temporary or medium-term problem.

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