Yahoo Finance Posthaste: Five things you might not know about Canada's historic housing 'correction'
Good Morning,
This is quite a ride our housing market has been on. During the pandemic record low interest rates helped push sales and prices to dizzying heights. The descent down after the Bank of Canada started raising interest rates in March has been equally astounding.
Small wonder that back in July RBC economists predicted this would be a historic correction.
Recently CIBC economists Benjamin Tal and Katherine Judge took a closer look at the reset of Canada’s housing market. Their analysis contains a few records set during this downturn and a few things you might not know.
Record-breaking swoon
Home sales had fallen for eight straight months before October brought a small uptick. Not only is that the longest stretch of falling sales on record, it is also the steepest, said the CIBC team. “And it’s not really over yet.”
Putting prices in perspective
Prices are also setting records. With the average price of a home in Canada down 20 per cent since February the correction is already the steepest on record, said Tal and Judge. But it’s also a matter of how you look at it. When the descent is viewed from the perspective of how high prices climbed before the correction, this fall is the mildest of the five housing downturns since 1981.
How you measure prices also makes a difference. Tal and Judge say the average home price index can be deceiving because it averages all prices and doesn’t take into account the composition of the sales. If more of less expensive units are sold then it can lead to a decline in the index even if prices are rising.
They prefer the Canadian Real Estate Association composite index which focuses on price changes in similar properties. A comparison of the two measures reveals that almost half of the 20 per cent drop in average prices since February is due to the composition of sales — reflecting lower sales in expensive homes. That is backed up by reality, the economists say, with detached homes seeing the largest drop in prices and condos the smallest.
Sellers still on the sidelines
A lack of new listings is another thing that sets this housing downturn apart. CIBC says available inventories are now at the double the level they were during the pandemic, but still well below levels before COVID. Toronto and Vancouver are now back to pre-pandemic levels but inventories are still below their long-term average.
The economists say sellers continue to sit on the sidelines with hardly any signs of distressed selling so far. “The abnormal behaviour of supply this time around has, so far, worked to limit the magnitude of the price decline,” they said.
No vacancy
Home sales might be slowing but the rental market has never been tighter, said Tal and Judge. With an estimated 700,000 people coming into Canada this year “demand for rental units is at a record high,” they said.
And market forces are working to make it tighter. Over the past year the cost of owning a home has risen much more rapidly than the cost of renting one, reducing investor demand in the condo market, a major source of rentals.
The CIBC team estimates that about a third of investors in this market were in negative cashflow territory before the pandemic. Those numbers will have swelled as interest rates climb.
“Add that to the recent notable decline in condo-presale activity and the delays/cancellations of purpose-built projects due to escalated costs, and you have a sure-fire recipe for an even tighter rental market in 2023,” they said.
Back to balance
The majority of housing markets in Canada, 60 per cent, are expected to be balanced by 2023 as sales and prices decline. This comes from Re/Max Canada’s housing market outlook released today and is based on analysis by brokers across the country.
Re/Max says the Greater Toronto Area, Greater Vancouver Area, Calgary, Regina and Winnipeg are already in balanced markets “in what is being called a healthy development.” Ottawa, Montreal and Halifax continue to be sellers’ markets.
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Canada is a world leader in rising home prices. Today’s chart from the Federal Reserve Bank of Dallas via the Canada Mortgage and Housing Corporation, shows how prices have risen (or dropped) in major markets around the world over the past 10 years. Not much of a surprise that Canada is among the highest with a 105 per cent increase. Unfortunately, while real incomes have risen as well in Canada, they haven’t risen nearly as much. To make Canadian housing affordable, CMHC estimates another 3.5 million home will have to be built by 2030.
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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.
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