Canada: Home Sales Surge, But Don’t Cue the Comeback Just Yet
- Canadian existing home sales jumped by almost 9% in December 2023 to end a string of five straight monthly declines. Table 1 below summarizes key data points.
- We’re tracking annualized real GDP growth of around 0.5% in Q4 2023, which is a touch below the Bank of Canada’s (BoC) latest projection of 0.8%.
Those hoping for the start of a recovery in home sales last month will be encouraged by some of today’s data. Information from Toronto released earlier in the month suggested that market may have turned a corner in December 2023 as interest rates trended lower. A huge monthly sales increase in Canada’s largest city and a second straight rise in some nearby centres appear to corroborate that story for Southern Ontario. The high-priced Vancouver market also experienced a solid gain, having seen particularly steep drops after the Bank of Canada’s monetary tightening campaign resumed in June 2023.
But real estate activity is still soft across much of the country as homeowners and prospective homebuyers grapple with the effects of accumulated rate hikes. Even after December’s spike, national-level home purchases had still given back almost 30% of the sales gains seen between January—when the central bank initially paused tightening—and June. Moreover, sales closed out last year below 2019 levels everywhere but Alberta (graph 1), which is being buoyed by some of the strongest economic conditions in the country and an influx of young Canadians from other provinces. And going forward, a weakening labour market implies softer demand for housing and some downward pressure on home prices by extension.
The supply side of the market also still suggests limited upward pressure on home prices over the next several months. We suspect that a third consecutive decline in new listings in December mostly reflects the environment of price and sales weakness over last several months. That trend could reverse if lower interest rates stimulate sales later this year, potentially capping price growth. So, despite the December 2023 results, new listings ended 2023 meaningfully higher than a year ago, and that has helped tilt market conditions more in favour of buyers (graph 2). The strong and steady rise seen in the months following the second round of interest rate hikes suggests that many individuals who bought homes in a lower-rate environment are now struggling with sharply higher borrowing costs. Much like new listings, inventory levels fell back to end 2023, but remained elevated versus much of the past year. Months of inventory in Ontario remained near the highest levels since the early 2010s.
Ultimately, today’s release doesn’t change our view that the Bank of Canada is done hiking, and will begin cutting by the middle of this year. There’s no question that the central bank will be monitoring the housing market as rates come down. But one strong sales gain doesn’t make a trend, so for now, the BoC should put more weight on the softness seen in recent months, as well as mounting evidence that the Canadian economy is weakening amid sharply higher borrowing costs.
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