After a spirited recovery this spring, Canada’s housing market is cooling again due to rising mortgage rates and recession fears. If not for healthy job growth and a booming population, the market would be even colder, given the worst affordability in more than three decades. Demand will stay depressed until the Bank of Canada cuts rates, possibly next summer. Don't expect a repeat of the spring fling.
Existing home sales have fallen for three straight months to September to below normal levels and are likely to stay down in the first half of next year. New listings have risen above normal. Benchmark prices, which fell for the first time in six months amid slumping demand and rising supply, are still down 10% after peaking in early 2022, and could sag another 6% before the market finds a footing. Strength in a few regions, notably Alberta amid decent affordability and strong population inflows, won’t offset weakness in more expensive places such as Toronto, Vancouver, and much of Southern Ontario.
Preliminary data suggest Greater Toronto’s resale market slumped further in October. Sales dropped for a fifth straight month, down 6% in the past year to historically low levels. New listings shot up, and, at three per sale, are the highest since the Great Recession. The pivot back to a buyers’ market has benchmark prices falling at an accelerating rate in the past three months and barely above year-ago levels. Even the less expensive condo market is feeling cold to the touch. While new condo sales picked up last quarter according to Urbanation, they remain low, with investors missing in action and builders slashing presale project launches. The latter will only delay much-needed construction in the years ahead.
The story is similar in Greater Vancouver, though its temperature is a bit higher than Toronto’s. Sales rose last month and are up 4% from a year ago, but they are 30% below the past-decade average for October. New listings jumped 15% in the past year to above normal levels. The sales-to-active-listings ratio has shifted from sellers’ territory to a balanced market, and will likely favour buyers soon. Benchmark prices are still up 4.4% in the past year, but slipped 0.6% last month.
By contrast, Calgary still has one of the hottest markets in the country, though it, too, is feeling a chill. Sales eased in October, but are still up 17% in the past year and relatively high. The condominium market is especially strong, soaring 47% y/y, as buyers and investors look for the least expensive option amid interest rate anxiety. While new listings are on the rise, active supply is still down 18% in the past year. The low 1.5 months supply (at the current sales rate) gives sellers full rein. Accordingly, benchmark prices keep punching higher and are up 10% y/y, led by a 16% spike for condos.
Canada’s housing challenges are twofold and interrelated: a lack of affordability and an inability to match supply with explosive population growth. It will take a sustained period of softness in prices and major reductions in interest rates to address the first issue. Meeting the supply challenge could prove intractable given a shortage of construction workers, though government policies to lower developer costs are starting to gain traction. The hope is that supply will increase before interest rates fall materially and spark another upturn in demand, which, in a supply-constrained market, would only feed higher prices and strangle affordability.
One major economic cost of poor affordability is that Canadian families are spending a record share of disposable income on mortgage payments (8.1% in Q2) and a near-record share (14.8%) on all debts, leaving fewer funds available to spend on things that generate production and jobs. While affordability is also at multi-decade lows in the U.S., less-indebted American households (many with still-low fixed mortgage payments) are spending a near-record-low share of income (4.0%) servicing their mortgage (versus a record high 7.2% before the financial crisis) and just 9.8% on all debt payments. For Canada to have a reasonable chance of closing a widening chasm in living standards with the U.S., beside filling a deep productivity hole, it will need to build a lot more houses at a cost that most people can comfortably afford.