After starting the year at a two-decade low, supply has steadily risen across Canada over the last several months. While the influx of new listings has helped bring more balance to the market, economists speculate that the underlying cause may be troubling.
Between April and July, new listings experienced their steepest-ever three-month increase outside of the pandemic, rising a cumulative 21%. The surge slowed somewhat in August, perhaps due to faltering sales, although new listings still managed to edge up 0.8% from July.
"The significant and broad-based unwinding of supply tightness in recent months points to a considerable shift in market sentiment," Marc Desormeaux, Principal Economist at Desjardins, wrote in a recent report.
"This suggests that many homeowners are increasingly struggling under the weight of sharply higher borrowing costs."
RBC’s Robert Hogue, Assistant Chief Economist, and Rachel Battaglia, Economist, drew the same conclusion, suggesting in a market update that high interest rates and elevated ownership costs may "force the hand" of some homeowners to sell, while simultaneously "crossing the budget line" of prospective purchasers.
Sales have been on the decline for four straight months, most recently dropping 4.1% from July to August. Although this has brought the national sales-to-new-listings ratio to a balanced 56.2%, Desormeaux cautions that there will not be an "imminent" improvement in affordability.
The Bank of Canada (BoC) elected not to raise interest rates this month, but has said further increases are still a possibility as inflation remains high. Desormeaux doesn’t expect rate cuts to begin until at least Q1 2024.
He also points to recently updated projections from the Canada Mortgage and Housing Corporation (CMHC), which found that 3.5 million additional housing units will be needed by 2030 in order to restore affordability on a national level. If Canada's population continues to grow at its current rate past 2025, the housing supply gap will swell to 4 million units come 2030.
A separate Desjardins report found that in Toronto, even a "severe" recession would only return affordability to late-2015 levels, which were already stretched, by 2025.
Although the pace of price growth has slowed in recent months — Canada's MLS Home Price Index (HPI) rose just 0.4% from July to August and only 1.8% from June to July — prices are now above year-ago levels. As of August, the MLS HPI sat at $757,600.
With more balance in the market, Hogue and Battaglia expect the pace of future price gains will be "muted," and declines are not to be ruled out. Despite the potential for lower prices, the overarching lack of affordability, and looming recession, will keep Canada's housing market "relatively calm" over the next few months.