The Canadian housing market remained in a tough spot in August and, while some metrics improved, more adjustment looks yet to come.

Canadian home sales dipped 1.0% in August (seasonally adjusted), or 24.7% from a year ago. At the national level, that leaves activity back in the pre-COVID range, or roughly 40% below the peak of the demand-side blowout last year on a seasonally-adjusted basis. Some markets, like Ontario and parts of B.C., are exhibiting recession-like sales levels, but those are offset by still-firm activity in others like the Prairies and Atlantic Canada.

At this precise moment, it’s a bit of unique situation where many potential buyers have pre-approvals in hand from before the big wave of BoC tightening, while also looking at 10%-to-20% discounts on home prices—if you can buy at a discount with a mortgage rate that no longer exists, it could be enticing. But the bigger picture is that there is still an extremely heavy interest rate shock to absorb, and it will likely take more time to play out.

New listings were down 5.4% in the month, and the current level is consistent with pre-COVID norms. That has helped keep the market balance from deteriorating further. The sales-to-new listings ratio improved to 54.5% in August, from 52% in the prior month—still soft, but not a deep buyers’ market—mileage varies across the country, with some areas (e.g., exurbs of Toronto), facing much tougher selling conditions. At the current run rate of sales, that leaves 3.5 months’ worth of inventory on the market, which is up from 1.7 at the recent lows, but still lower than we were used to before the pandemic (readings in the 4 to 6 range were common).

Simply put, some markets do have supply lingering, but we’re far from any widespread flood. Anecdotally, there’s very little forced selling in the market, with sellers in many cases happy to pull listings and wait for better conditions. Investors also have a very tight rental market to fall back on and, although cash flow conditions have deteriorated significantly because of higher rates, rents are surging in the major centres as a partial offset.

The MLS HPI was up 7.1% y/y in August, but continues to fall on a month-to-month basis at an annualized clip of roughly 18%. From peak levels set in March, the index is now down 7.4%. Some markets (again, mainly smaller Ontario markets) have been hit much harder with prices on the ground easily down 10%-to-20% from the highs. The average transactions price was down 3.5% y/y in the month.

At the end of the day, this is still a market that needs to adjust to higher interest rates, and coming from widely-available 1.5% mortgage rates, to what will likely average around 5% through the fall, is a major shock. We haven’t seen one of this magnitude since the 1980s. As noted above, rate-holds of up to 130 days are still in the system, which reflect a cost of borrowing from before the latest 175 bps of Bank of Canada tightening. With at least another 50 bps to come in short order, there is likely more repricing to go. In the meantime, the standoff between sellers (who need to come to the reality that early-2022 prices don’t exist anymore) and buyers (who simply can’t pay as much) will continue, and the process could be drawn out until well into next year.

Housing declines can evolve something like this: Sentiment break -> fundamental price adjustment -> economic hardship (e.g. job losses) -> defaults and forced selling—but we do not think we are going all the way to Step 4. The financial crisis circa 2008 saw the U.S. market go all the way to Step 4. The 1990s in Ontario saw the cycle go deep into Step 3. At this point, we continue to believe that, barring a much more significant economic downturn than we have penciled in, this episode will remain a fundamental price adjustment (that is, stop at Step 2). It will take time, but that’s still how it looks today.

Table 1 - Canada — Existing Home Sales

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Source: BMO Economics, Haver Analytics, CREA