Canada’s home prices will continue to fall throughout the winter before picking up with the spring showers, according to a new report from TD Economics.

In a climate of persistently high interest rates and heightened living costs, TD Economist Rishi Sondi predicts that the country’s home prices and sales will drop over the coming months. Some relief, Sondi says, will come in the second quarter of the year, when these factors will begin to increase again.

According to Sondi, a major catalyst for Canada’s resale activity succumbing to a wave of downward pressure was the country’s central bank. Bank of Canada (BoC) ended a four-month period pause when it hiked its policy rate in both June and July (not that many need the reminder).

“In essence, these rate hikes were hitting a market that was already down,” writes Sondi. “Making matters worse, the five-year Government of Canada bond yield has increased about 130bps over the past 6 months to a new multi-year high of around 4.2%.”

The economist says that national sales have pulled back by about 5% and remain about 12% below their pre-pandemic levels. However, Sondi says this drop in activity has been minor compared to the 40% plunge in sales from the early part of 2022 through the beginning of the year.

“The shift observed in market balance has been considerably more notable, as lower sales have coincided with a sizable increase in new listings,” writes Sondi. “Indeed, the Canadian sales-to-new listings ratio has plunged from nearly 70% (indicating very tight conditions) in April to 51% (the softer side of what's considered balanced) in September. The latter marked the lowest point for the ratio since July of last year.”

Sondi, however, highlights a regional divergence that has emerged, revealed in differences in sales-to-new listings ratios across provinces. These regional variations mark a departure from the “remarkable synchronicity” seen across the provinces for most of the past three years.

These ratios are at or above long-term averages in most provinces, aside from the notoriously pricey British Columbia and Ontario. “In these two latter markets, sales have tumbled, and average price declines have been amongst the most pronounced since the BoC resumed hiking rates,” writes Sondi. “These are two markets where affordability has recently breached historical worsts.” On the other hand, better affordability conditions have supported firm growth in sales and prices in both the Prairies and Newfoundland and Labrador. Alberta’s fastest population growth in the country has brought a boost in activity.

On the supply side, Canadian new listings increased for six straight months through September, marking a 35% surge over that time. With that said, because the starting point preceding these gains was so low, they had only returned to their long-term average.

Ontario, however, represents an important exception. Here, new listings have leapt even higher to levels that are notably above long-term averages. Rather than homeowners choosing to sell, Sondi highlights that this reality could indicate that higher rates are impacting supply via pressures on homeowners. “This supply bulge has driven the sales-to-listings ratio down to 40%, the lowest it's been since the depths of the Global Financial Crisis,” writes Sondi.

This weakness has been especially pronounced in Toronto and markets in Central Ontario (like Hamilton, Kitchener-Waterloo, and Niagara). “However, even markets in Southwestern and Eastern Ontario are showing signs of softness,” writes Sondi. “Only in Northern Ontario are housing conditions generally more balanced.”

Looking ahead, Sondi says we can expect Canadian home sales and average prices to fall in the final quarter of the year and into Q1 of 2024, as the impact of higher rates continues to take a toll on monthly budgets. Relative to third-quarter levels, Sondi says that sales and prices should be about 10% and 5% lower, respectively by the end of Q1 2024.

“Thereafter, we expect both sales and prices to pick up, starting in 2024Q2,” writes Sondi.

The key, however, is the assumption that Canada will finally have some relief on the interest rate front come spring, as the unemployment rate continues to rise and inflation moves closer to BoC’s 2% target. While BoC has demonstrated what Sondi calls a bias toward rate hikes (and many mortgage payers would surely agree), the central bank held its key interest rate at 5% on Wednesday.

Generally speaking, Canada won’t see pre-pandemic level home sales in the near future. Sondi predicts that it will take until 2025 for Canadian home sales to sustainably surpass their pre-pandemic level.

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