There are nascent signs that tight real estate market conditions in Canada’s two largest cities are beginning to loosen and slow price appreciation, says a report from RBC Economics.

However, that also means affordability challenges will persist -- even though price appreciation will decelerate, Canada’s rising interest rate environment will preclude market participation for countless Canadians. But, early as it is, the Bank of Canada’s March 2 25 basis point increase sent Canadians a ‘now or never’ signal and sales may have exacerbated demand, RBC contends. Nevertheless, as interest rates continue rising -- RBC anticipates additional 1.5% increases by the end of the year -- fewer homes will change hands.

Is the GTA Topping Out?

Although the spring market, which is the busiest time of the year in real estate, has begun, sales activity in the Greater Toronto Area is tamer than usual, as transactions on the resale market declined by 30% year-over-year in March. It can be argued that 2021 repeatedly set records, but it’s also instructive to note that sales last month also decreased by 16% from February.

READ: Average GTA Home Price Drops in March as Supply Surges

Tight inventory conditions in the GTA real estate market will persist but at least the supply-demand chasm is closing. RBC speculates that affordability woes are catching up and cleaving demand for housing. While home price appreciation remains substantial, it is decelerating. In March, the composite MLS HPI increased by 2.7% from February, which is below the 4.4% increase during the previous five months. Compared to last year, the price index’s growth has moderated, albeit marginally, to 34.8% from 35.9% in February.

RBC’s report noted if affordability difficulties don’t dissipate, more buyers will be stuck on the sidelines and home valuations could significantly moderate, but at the very least, the pace of growth is softening, possibly giving way to a peak in the coming months. At $1.38M for a standard ground-related home, an increasing number of transactions concern condominiums, bringing down the average sale price down by 2.6% month-over-month in March.

Homebuyers in Montreal Are Growing Weary

Resales declined by an estimated 4% month-over-month in March, marking five straight months of decreases in Canada’s second largest city, but a major reason for that is historically-low inventory going back to 2021. RBC nonetheless surmises that rising prices are beginning to take their toll on Montreal area homebuyers, although it also sees signs of moderation, especially in the single-family market detached market. The sales-to-new-listings ratio dropped in March and RBC indicated that could be a harbinger of a balanced market to come.

Vancouver Remains on Fire

The third-largest city in the country is having a busy spring market, with resales increasing by 4% month-over-month in March, and because there were fewer listings from which to choose, that signifies a market on fire. The MLS HPI benchmark rose by 20.7% year-over-year in March, and by 3.6% from a month earlier, to $1.36M, and RBC sees more room short-term for growth because sellers have all the leverage. Moreover, listings fell again in March and ensured the supply-demand imbalance.

However, there’s only so much room for growth; RBC anticipates that sales activity will peak some time this year as buyers find fewer reasons to justify such lofty purchase prices in a rising interest rates environment. That should result in balanced market conditions, including price stabilization, and the search for affordability will impel buyers to set their sights on the city’s condominiums or search well beyond the urban core in British Columbia’s smaller, reasonably-priced markets.