Housing market conditions were very firm as of May, and prices in many markets were moving notably higher. Regionally, the momentum is broad based. Existing home sales rose 5.1% in seasonally-adjusted terms in May, the fourth consecutive monthly increase. That leaves activity up 1.4% from a year ago, the first positive reading since mid-2021. The level of activity is now consistent with that seen in the three years before the pandemic. Meantime, new listings are showing a bit of life, up 6.8% (seasonally adjusted) in May, but they’re still down more than 13% from a year ago and sit about 16% below the three-year pre-COVID average. So, while there are some very early signs of better listings flow, the dearth to this point has tightened up the market.

The sales-to-new listings ratio dipped slightly to 67.9 in May, but that remains tight by historical standards and up from a low of 50.8 last summer when prices were correcting sharply. At the current sales pace, there’s still only 3.1 months’ worth of inventory on the market, which also reflects tight conditions. We’ve documented at length in other venues the many reasons why listings are being held back—no forced selling, strong rental market for investors, less mobility with the surge in mortgage rates—and there remains little movement on this front.

That all leaves prices pushing higher again, with the average transactions price up 3.2% y/y, the first gain since the correction began early last year. The benchmark MLS HPI is still down 8.7% y/y, but we’ve now seen two consecutive month-to-month increases averaging 27% annualized. Now, when exactly did the market bottom and start to swing higher again? March. Or, the minute the Bank of Canada paused its rate-hike campaign.

Where are we now? Remember how we got here: The Bank of Canada cuts rates to historic lows and promises to keep them there—housing activity runs wild. The Bank begins to raise rates—housing activity goes dark. The Bank pauses rate hikes, effectively telling Canadians that the worst is over—housing activity rises quickly from the ashes. Following this sophisticated train of logic, it stands to reason that the Bank’s latest 25 bp rate hike will again dampen market psychology somewhat and take some steam out of recent activity. At the same time, a selloff in bonds has lifted GoC yields and pushed up shorter-term fixed mortgage rates that had become very popular (and offered some relief) during this market turnaround. We suspect that, as the Bank of Canada continues to lean against inflation (and has signalled an awareness of this rekindled housing-market strength), recent momentum will settle down and stabilize through the rest of the year.

In a separate release, Canadian housing starts fell sharply to 202,500 annualized units in May, the lowest monthly reading in three years (i.e., since the depth of the pandemic). While that's in part a payback from prior-month strength, we’ve seen a clear rolling over of housing starts, with the 3-month average now at 226k; the 6-month at 230k; and the 12-month average at 252k. This will confound policymakers pushing for a doubling of new housing output, but is right on cue from our perspective. That is, an industry that was already running at full capacity is now grappling with higher interest rates and a falloff in presale (i.e., investor) demand. New housing starts are still on pace to fall this year from last year’s near-record 262k pace.