Canada: Home Sales Decline with the Bank of Canada Now on the Sidelines
- Total Canadian existing home sales plunged by 4.1% in August 2023. It was the second consecutive monthly decline and the fastest drop since the period immediately following the Bank of Canada’s first rate hike last year. Table 1 summarizes key data points.
- Our tracking still suggests real GDP growth will be only slightly positive in Q3 2023, which is far weaker than the Bank of Canada’s last projection of 1.5% annualized (see our latest Economic and Financial Outlook released yesterday).
It’s now been two months since the Bank of Canada last hiked interest rates, and it’s clear that Canada’s housing market has responded. The sales and price momentum that built up during the central bank’s initial holding period has obviously stalled, and we’re seeing weakness spread increasingly beyond the highest-priced cities (graph 1). This supports the Bank of Canada’s decision to pause rate hikes at its September meeting.
Results on the supply side of the market were more mixed. As we previously noted, national-level new listings came into this release having experienced their steepest-ever three-month increase outside the pandemic. That followed a period earlier this year in which tight supply contributed to sharp price gains. In August, the pace of new listings growth slowed, perhaps in response to a weaker sales environment. Still, the significant and broad-based unwinding of supply tightness in recent months points to a considerable shift in market sentiment. This suggests that many homeowners are increasingly struggling under the weight of sharply higher borrowing costs.
Although this report indicates that short-run housing demand and supply are increasingly aligning, a return to affordability isn’t imminent. Mortgage carrying costs remain elevated, and we still don’t anticipate that the Bank of Canada will reduce interest rates until the first quarter of 2024 at the earliest. Moreover, despite surging new listings, updated CHMC estimates published earlier this week confirm that long-run homebuilding trends are woefully insufficient to meet the needs of a rapidly growing population. In fact, Desjardins Economic Studies recently projected that even a severe, 1990s-style Ontario recession would only return housing affordability in Canada’s largest city to already stretched, late-2015 levels by the middle of this decade.
That said, some regional differences remain. More affordable Alberta cities are in the midst of the strongest population growth of any Canadian jurisdiction (graph 2). Municipalities in Wild Rose Country have yet to see as significant a slowdown in purchasing activity as Toronto, Vancouver, and nearby centres have. Going forward, we expect the sales volumes in the Prairie Provinces to increasingly feel the effects of sharply higher interest rates and a souring economic backdrop. But better affordability, record or near-record headcount gains that appear likely to persist, and relatively little exposure to real estate-oriented economic sectors bode well for housing markets in the region.
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