TD Economics Report: Canadian Home Prices Expected to Slide This Winter
A recent report from TD Economics suggests that Canadian home prices are set to experience a dip throughout the winter, with a potential rebound anticipated in the spring.
TD Economist Rishi Sondi foresees a decline in home prices and sales in the coming months due to persistently high interest rates and escalating living costs. However, some relief is expected in the second quarter of the year, when these factors are predicted to stabilize and show signs of improvement.
Sondi points to the Bank of Canada (BoC) as a significant factor responsible for exerting downward pressure on Canada's resale activity. The BoC raised its policy rate in both June and July, creating additional strain on a housing market already facing challenges. Furthermore, the five-year Government of Canada bond yield has surged approximately 130 basis points in the last six months, reaching a multi-year high of around 4.2%.
National sales have decreased by about 5% and remain approximately 12% below their pre-pandemic levels. Nevertheless, Sondi notes that this reduction in activity is minor compared to the 40% decline in sales seen from early 2022 to the beginning of this year.
Sondi highlights a notable regional disparity that has emerged, revealing differences in sales-to-new listings ratios across provinces. This shift marks a departure from the previous "remarkable synchronicity" seen across the provinces over the past three years.
While these ratios are at or above long-term averages in most provinces, British Columbia and Ontario stand out with lower ratios. In these two provinces, sales have plummeted, and average prices have seen substantial declines. These are markets where affordability has reached historically challenging levels. On the other hand, regions such as the Prairies, Newfoundland, and Labrador have experienced robust growth in sales and prices due to improved affordability conditions. Alberta's significant population growth has also contributed to increased activity.
Regarding the supply side, Canadian new listings have surged for six consecutive months through September, resulting in a 35% increase during that period. However, this surge only brought listings back to their long-term average due to the initially low starting point.
Ontario, on the other hand, presents a different scenario, with new listings significantly exceeding long-term averages. Sondi suggests this could indicate that higher rates are impacting supply through homeowner pressures. This surge in supply has driven the sales-to-listings ratio down to 40%, the lowest level since the Global Financial Crisis.
This softening trend is most pronounced in Toronto and markets in Central Ontario, with signs of softness appearing even in Southwestern and Eastern Ontario. Northern Ontario, in contrast, presents more balanced housing conditions.
Looking ahead, Sondi anticipates a decline in Canadian home sales and average prices in the final quarter of this year and the first quarter of 2024 due to the ongoing impact of higher interest rates. By the end of Q1 2024, Sondi estimates that sales and prices should be approximately 10% and 5% lower, respectively, relative to third-quarter levels.
Sondi further predicts that both sales and prices will start to recover in the second quarter of 2024. However, the key factor is the assumption that Canada will experience interest rate relief in the spring, alongside rising unemployment rates and inflation moving closer to the BoC's 2% target. While the BoC has shown a preference for rate hikes, the central bank maintained its key interest rate at 5% in its recent decision.
It is unlikely that Canada will see a return to pre-pandemic home sales levels in the near future. Sondi suggests that it may take until 2025 for Canadian home sales to sustainably surpass their pre-pandemic levels.
