Canada’s Housing Market Is Cooling. A Recalibration Or Something Bigger?

Canada’s housing market is feeling the strain of rising interest rates, with nine out of 10 provinces seeing a decline in sales in May. Kim Parlee speaks with Rishi Sondhi, Economist at TD Bank, about the new landscape for real estate and the outlook going forward.

Transcript

– Let’s start with your forecast. I mean, you’ve downgraded your forecast for Canadian housing in a fairly big way compared with your outlook from March. What kind of decline are you expecting? What do you see?

– Yeah, so we’re expecting Canadian home sales to decline by about 33% on a peak-to-trough basis from the end of first quarter of 2021 to the first quarter of– or I’m sorry, the first quarter of 2022 to the first quarter of 2023, so in a relatively steep decline in sales. By our estimation, we’re about halfway through what we project to be the duration of this drop, so a pretty steep drop in sales. In line with what we’ve seen historically, actually. Now, with respect to prices, we’re anticipating a 19% peak-to-trough drop decline over the same period, so from 2022 Q1 to 2023 Q1, so pretty steep declines on both fronts, after which we should see some stabilization in the market as we progress through next year.

– And I know that you’ve talked about this more, is it recalibration rather than something more ominous. And I think that has a lot to do with the fact, when you talk about peak-to-trough, those peaks are pretty high already.

– Mm-hmm. Definitely. I mean, in the run-up to the pandemic, Canadian average home prices went up by about 50%. So from February 2020 to February 2022, so that’s obviously an extremely steep and frankly unsustainable pace of price increases.

So a 19% drop from after a 50% gain really only takes back a portion of the increase that we saw, so it’s more of a recalibration we’re calling it rather than something worse. So that’s definitely an important point, and there’s several sort of supportive factors that are underpinning our view that there will be a steeper correction in prices. In particular, we’re expecting pretty robust population growth. I mean, we’ve had some evidence of that in the data thus far.

Canada is enjoying positive terms of trade shock, meaning that elevated commodity prices are supporting the price of our exports and boosting incomes in several provinces in the country. So those are two support factors. We also expect economic growth to continue as our baseline. So that’s another factor we think will help sort of underpin housing demand moving forward.

– Hmm. Interesting. If we could, let’s do a geographic survey just to run through really quickly in terms of what provinces are doing what. You say the biggest declines will be felt in Ontario and BC. How come?

– Well, that’s where affordability deteriorated the most during the course of the pandemic. So those two jurisdictions saw relatively steep price increases during the course of the pandemic, so they’re sort of the most vulnerable, particularly in Toronto and surrounding markets. Investor activity, we’ve had some evidence that investor activity picked up quite markedly during the course of pandemic, again, particularly in Toronto and markets surrounding Toronto. So there are some vulnerabilities there.

We think that investors may be a little bit more sensitive to rising interest rates than other types of buyers. So as interest rates rise, that could put some disproportionate downward pressure on sales and prices. So that’s a story from Ontario again.

And BC, it’s more of an affordability story. Affordability was already extremely poor heading into the pandemic, and the pandemic has obviously made it worse. And we are in fact in the data seeing sales and prices retrench the most in those two jurisdictions thus far.

– What about Alberta? I mean, Alberta is getting the benefit I guess a little bit in oil prices, but it’s not translating like it used to for many reasons I won’t get into. What do you see?

– Yeah. Well, you know, sales are correcting in Alberta as well, but the big difference there is that the level of sales is still quite elevated. So we just got June data out today actually. Well, the round of local board data was completed today and we got a snapshot at what’s going on in Calgary. So it looks like sales fell in June in Calgary, for example. But they were still about 70% above their pre-pandemic level, whereas if you compare it to a jurisdiction like Toronto is about 20% below.

So that’s a big difference there. Alberta, the market is correcting, but it’s correcting from an extremely high level. And the level of sales is still quite high there. And that’s supporting tighter markets and stronger price growth.

So moving forward, we do expect that correction in sales to continue. But because affordability is relatively good in Alberta, that should support higher level of sales activity compared to Ontario and BC, tighter markets, and a stronger price growth compared to those two bigger provinces, or to other big provinces.

– Rishi, I’ve only got a couple of minutes, and I don’t want to forget Atlantic, so let me ask you quickly. The prairies, Saskatchewan in Manitoba, Quebec, Atlantic, what do you see?

– Oh, yeah. So for the prairies, we think price is going to outperform, and that’s a function of the fact that affordability still quite decent in those markets because home prices didn’t really appreciate that much during the course of the pandemic. And Quebec is I would say in between the other big provinces and some of the other jurisdictions there in that I did see its affordability deteriorate to a fairly notable extent. We expect to see some downside there.

Now, the Atlantic regions– excuse me. The Atlantic region is a little bit interesting in that they’ve had pretty robust population growth fueled by interprovincial migration, particularly people leaving Ontario for jurisdictions like New Brunswick and Nova Scotia. And that’s underpinned housing demand even through this year.

So we’ve seen sales and price declines in other markets, but not so much in the Atlantic in the aggregate so far. So that’s a good news story. We do think population growth in these markets will slow as interprovincial migration slows due to the fact that remote work will be reined in. So that that’ll put some downward pressure on sales and prices, although, that’ll hit with more of a lag than some of the other markets.

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