Canadian Housing: Soft Landing, Soft Takeoff
April data on Canadian existing home sales out next week should show that sales and prices are carving out a bottom. Apart from a brief bounce early last year on premature rate-cut hopes, the market has been in correction mode ever since rate hikes pricked the pandemic bubble. Sales have steadied just below normal levels, while benchmark prices have found a floor after falling 14% from the roof. Given the 54% climb in the prior two years, that’s a fairly painless landing. Regions that flew closer to the sun fell the hardest, but almost all areas are stabilizing now. A lucky few—Calgary, Saskatoon, St. John’s, Moncton—are still climbing the ladder.
Three forces will propel the market’s recovery: falling interest rates, an improving economy, and favourable demographics. The population is both growing and skewing younger. The median age (41) is falling as Millennials surpass the Boomers as the largest generation. The oldest Millennials (43 years) are moving into bigger homes, while the youngest (28 years) are pining to get a foot in the door. Their task will be lightened once rates start to fall, likely this summer.
But, unlike after the financial crisis or pandemic shutdown, the expected recovery won’t be V-shaped, for four reasons. First, the economy will likely remain soft this year, lifting the unemployment rate a little further.
Second, policy rates look to fall very gradually and land higher than after the financial crisis and pandemic. The Bank of Canada is expected to reduce its target rate from 5% to 3% over two years. Recall, it fell to 0.25% in the earlier two crises and didn’t exceed 1.75% until July 2022. Moreover, longer-term fixed mortgage rates should decline much less than policy rates, as bond investors have already priced in easier monetary policy. This will leave affordability stretched in B.C. and Ontario. Alongside rate cuts, what’s needed is a prolonged period of prices lagging rising incomes; the complete opposite of what has happened for much of the past two decades.
Third, while Canada’s population will keep growing due to the government’s annual target for new permanent residents (500k starting next year), it will slow materially. The plan is to reduce the share of nonpermanent residents from around 6.5% to 5.0%, which could chop annual population growth from 3.2% to about 1%. This will ease excess demand pressures in Ontario and B.C., where temporary foreign workers and international students have been big population drivers.
Fourth, housing supply is finally ramping up. Completions and units under construction are at record highs, supported by a flurry of new policy measures to spur construction and lower costs, such as removing the HST on new rental buildings. Greater Toronto is already seeing a wave of new condo units hitting the market, from investors who were swimming with the current when soaring prices and tiny borrowing costs masked negative cash flows; but now, are drowning in a sea of rising rates, falling prices, and, more recently, declining rents. The condo market will eventually absorb this glut, but, until then, it will weigh on prices and may even douse a few sparks that pop up in the sturdier detached-home market.
Bottom Line: After a two-year descent, Canada’s housing market is landing gently. But the takeoff will also be subdued and won’t create much turbulence for Captain Macklem and crew.