Extra Innings: The Correction Continues
Canada’s housing market remained balanced overall in September, with the toughest conditions largely contained to Southern Ontario and parts of B.C. At the national level, sales are back in-line with pre-COVID norms, although new listings remain elevated. Here are three high-level themes to keep in mind right now:
There is no “Canadian housing market”, with conditions varying significantly by region. For example, the Prairies and Atlantic Canada are still very tight with strong prices near record highs. However, Southern Ontario is still deep in correction territory. Even within the GTA, there are performance gaps showing between small previously investor-dominated condos, and single-detached homes in quality areas.
Affordability is still challenged, leaving potential homebuyers needing either further price declines, or lower mortgage rates to get the market clearing better. We suspect that if we start to see low-3% mortgage rates, it might provide a spark, but we’re not there yet. That said, the current run rate of sales is pretty much back into the range of pre-pandemic norms, so it's not like the market isn't functioning.
Investors are absent, and rightfully so. A generation of real estate 'investors' has just learned that you need to be compensated to take on a risky asset, and many forgot that there is indeed plenty of risk. That is, nonpayment risk, bad tenant risk, rents falling, high transaction costs and no liquidity. We still believe that cap rates need to widen further versus risk-free yields, and borrowing costs need to fall further to improve cash flow dynamics. This is no longer a market driven by price expectations.
Existing home sales fell 1.7% in seasonally-adjusted terms in September, but were up 5.2% from year-ago levels. Sales are effectively back into the range, albeit the lower end, of what was ‘normal’ before the pandemic. New listings dipped 0.8% in the month, and were up 8.0% from a year ago. That left the sales-to-new listings ratio to soften slightly to 50.7, still reflecting balanced overall conditions.
With balanced conditions, the national benchmark price was down just 0.1% in September on a seasonally-adjusted basis, which left prices 3.4% below year-ago levels. The national benchmark still sits more than 17% below peak early-2022 levels, and the sideways movement continues.
In a sperate release, Canadian housing starts rose to 279k in September, showing continued resilience despite tough resale conditions. Starts are now averaging 256k over the latest 12 months and have picked up from the lows seen early in the year. Note, however, that starts in Ontario have averaged 63k over the latest 12 months, the lowest in a decade. Rentals continue to drive housing starts, with activity in that segment now topping that for homeownership and condos combined.
Here’s a quick rundown of local market conditions:
Southern Ontario remains the weak spot, with a glut of condos under construction, hitting the resale market and pressuring prices. The wave of investor-owned supply is also spilling onto the rental market, pulling down rents at a time when population growth has stalled. Apartment prices are down anywhere from 3% to 14% from a year ago across markets like Toronto, London and Niagara.
Vancouver and some other markets across B.C. remain soft alongside elevated inventories, but they’ve become less-so in recent months. Vancouver is back in balanced market territory with the sales-to-new listings ratio at 42%, but both condo and detached prices are down 4% to 5% from a year ago.
Markets in Quebec and further east remain tight almost across the board. Price gains in those regions are firm, led by an 18% y/y jump in Quebec City, 6% y/y in Montreal and 9% y/y in Fredericton.
Calgary continues to soften, with a lot of the affordability/investor arbitrage (i.e., from Toronto to Calgary) now priced out. Sales are down 14% from a year ago, and the market is now balanced if not soft. The benchmark HPI is down 2.5% from a year ago. Interestingly, the cheaper Edmonton market remains very firm.