With home sales falling and new listings on the rise, Canada’s housing market is shifting gears once more. But the changing climate will not lead to a swift improvement in affordability.
The "downbeat picture" of the real estate market is courtesy of a new report from Marc Desormeaux, Principal Economist at Desjardins.
Although home sales spiked in the spring, under the false assumption that interest rate hikes had come to an end, the resale market has "clearly soured," since the Bank of Canada (BoC) began raising rates again in June.
While Desormeaux believes the BoC is now actually finished with rate hikes, there will not be the same ensuing uptick in activity. The full impact of this summer’s rate increases, as well as the aggressive tightening seen throughout 2022, has yet to be felt. Alongside softer employment gains, sales growth will stall, even as rate cuts begin in 2024.
At the same time, new listings have surged. Since April, they’ve risen 21% nationally, marking the fastest three-month increase seen outside of the pandemic. As Desormeaux notes, though, it will take a few months to discern whether the rise reflects investors timing the market or mortgage holders trying to escape higher debt servicing costs.
But regardless of the underlying factor, the increase points to a "shift in market sentiment," and both trends are expected to persist over the coming months.
Residential construction activity appears to be cooling, too. On paper, housing starts have not been as dismal as was to be expected following a year of declining sales. But, much of the resilience is due to "robust" multi-unit construction in Ontario and British Columbia; in the rest of Canada, activity is trending downward.
Labour shortages — employment in the construction industry has declined in four of the past six months — high borrowing costs, high material prices, and slowing economic activity are expected to further weigh on new home building going forward.
While the data suggests that the BoC’s efforts to rein in inflation are working, the outlook for an improvement in affordability long-term is less positive.
The decline in housing starts is occurring alongside an existing supply shortage and a rapidly rising population, a situation that is "not conducive" to any meaningful improvement in affordability. Strong multi-unit starts in Ontario and BC reflect a trend towards more rental construction, reinforcing the fact that home ownership is out of reach for many Canadians.
"Sharply higher interest rates increasingly appear to be having the desired effect of controlling price pressures, but housing affordability still remains a long way off," Desormeaux said.
"Against that backdrop, Canada’s federal, provincial, and municipal governments all have a responsibility to reduce the barriers to building and get more shovels in the ground. Only then can we ensure Canada remains an affordable and prosperous place to live—through the coming downturn and over the long run."
Last week, a collective of industry experts and stakeholders released a blueprint to build two million new purpose-built rentals. Addressed to the federal government, the plan calls on all levels of government, as well as builders, developers, and the non-profit sector, to work together to restore affordability to Canada’s housing market.
