Canadian Housing Market Navigates a Shifting Landscape: Decoding the Path to a Buyer’s Market

The Canadian housing market is experiencing a significant pivot, moving away from the frenetic pace seen earlier in the year. Recent data from the Canadian Real Estate Association (CREA) reveals a notable easing of house prices, accompanied by a 1.9 per cent decline in national home sales between August and September 2023. This marks the third consecutive month of decrease, a trend that is particularly unusual and warrants close examination, given that sales typically show an upward trajectory during this period.

National house prices are falling based on both HPI and Average metrics: pic.twitter.com/sg32PNsyq7

— Daniel Foch (@daniel_foch) October 13, 2023

While the overall national picture points to a slowdown, local market shifts have been varied. Major metropolitan areas like Greater Vancouver and the Greater Toronto Area observed declines, reflecting a cooling in some of Canada’s most dynamic markets. Conversely, regions such as Edmonton, Montreal, and Kitchener-Waterloo experienced smaller increases, indicating a more resilient, albeit modest, activity. Despite the current trend of slowing sales and a rise in new listings, the actual number of transactions in September 2023 was marginally higher—1.9 per cent—compared to September 2022, which was an unusually quiet period for the market. This suggests a subtle return to some level of activity, albeit from a low base.

National home sales volume trending down still – fell again from August to September. It is VERY rare for home sales to fall from August to September. pic.twitter.com/z8XDhFXu3w — Daniel Foch (@daniel_foch) October 13, 2023

The resale housing markets, after experiencing a record-setting spring earlier in the year, have now entered a phase of stabilization. This new equilibrium is heavily influenced by persistent low housing inventory and ongoing uncertainty surrounding future interest rate movements. Consequently, the market is broadly expected to remain subdued, particularly as the colder winter months approach. All eyes are now firmly fixed on the Bank of Canada’s upcoming decisions and the broader health of the Canadian economy, as these factors will largely dictate the market’s trajectory in the coming months.

Stabilized Markets Pave the Way for Potential Buyers

A significant development signalling a shift in market dynamics is the notable increase in new listings. September saw a 6.3 per cent month-over-month surge, representing a considerable rebound from the two-decade low observed earlier in March, with a cumulative gain of approximately 35 per cent. This influx of supply, juxtaposed with declining sales volumes, has led to a crucial metric, the national sales-to-new listings ratio, easing to 51.4 per cent in September. This is a noticeable drop from August’s 55.7 per cent and a sharp descent from the peak of 67.8 per cent recorded in April. This trend is particularly significant as it marks the first time since January that the ratio has fallen below the long-term average of 55.2 per cent, indicating a substantial recalibration of market conditions.

This evolving landscape, characterized by increased housing supply and a simultaneous moderation in buyer demand, is creating an environment increasingly favourable for prospective buyers. The once fiercely competitive bidding wars are becoming less common, replaced by opportunities for more considered purchasing decisions and potentially better negotiation leverage. For those who have been sidelined by the historically tight markets, this period of stabilization could represent a window of opportunity to enter the market with greater confidence.

The national inventory levels also underscore this shift. As of September 2023, there were 3.7 months of inventory recorded nationally, a slight improvement from August’s average of 3.5 months and a steady increase from the low of 3.1 months registered in June. While still below the historical average for a balanced market (typically 4-6 months), this upward trend in inventory suggests that buyers are beginning to have more choice and less pressure to act immediately, a welcome change for many.

Despite the recent dip in sales and the softening of market conditions, the year-over-year comparison of the Home Price Index (HPI) showed a modest increase of 1.1 per cent, with prices in certain regions across Canada still expected to rise. The national average home price in September 2023 stood at $655,507, representing a 2.5 per cent increase compared to September 2022. This mixed signal highlights the nuanced nature of the market; while momentum has slowed, underlying price appreciation in some areas from a year ago continues, reflecting sustained demand in specific segments or regions.

CREA Adjusts Forecast Amidst “Higher for Longer” Rate Environment

The Canadian Real Estate Association (CREA) has released a revised forecast for the real estate market in 2023 and 2024, presenting a more cautious outlook than its earlier projections. This adjustment mirrors similar downgrades from other prominent financial institutions, including RBC, Royal LePage, and TD Economics, all of whom are grappling with the persistent challenge of resurgent inflation and the Bank of Canada’s firm stance on a “higher-for-longer” interest rate scenario. This strategic shift by the central bank, aimed at taming inflation, has profound implications for the affordability and dynamics of the housing market.

The market experienced an unexpected surge during the Bank of Canada’s “rate pause” period earlier this year, creating a record-setting spring. However, this momentum proved to be unsustainable. The summer market, as is often the case, saw a seasonal slowdown, prompting observers to await fall market data to ascertain if the market had truly lost its steam. The evidence now suggests it has. Canadian real estate activity has decelerated significantly, primarily driven by the Bank of Canada’s series of rate hikes and the palpable uncertainty surrounding further increases. The anticipated boost in sales from a robust influx of new listings in the fall failed to materialize, leading to a dramatic shift in market sentiment and conditions.

The national sales-to-new listings ratio, a critical indicator of market balance, has plummeted from nearly 70 per cent just five months ago to approximately 50 per cent. This sharp decline signifies a rapid transition from a robust sellers’ market, where sellers held considerable power, to a balanced market territory, where neither buyers nor sellers have a distinct advantage. Should this trend persist and the ratio continue its downward trajectory, the national market is poised to firmly enter buyer’s market territory by the end of the year, offering buyers greater selection and potentially more favourable pricing.

National sales-to-new listings ratio has fallen from nearly 70 per cent to 50 per cent in just five months.

This has taken the market from a strong sellers market to balanced market territory.

Should this trend continue, the national market will be in a buyer’s market by end… pic.twitter.com/Xs6aK8OIRW

— Daniel Foch (@daniel_foch) October 13, 2023

CREA’s updated forecast projects a 9.8 per cent decline in residential property transactions for the entirety of 2023. This reduction is expected to be most pronounced in Ontario and British Columbia, provinces known for their high property values and, consequently, their greater sensitivity to credit conditions and interest rate fluctuations. In these markets, where buyers often rely heavily on financing, increased borrowing costs quickly translate into diminished purchasing power and reduced transaction volumes. The national average home price is also anticipated to decrease by 3.3 per cent annually, reaching an estimated $680,686 in 2023. While the overall outlook leans bearish, some provinces, including Alberta, Quebec, New Brunswick, Nova Scotia, and Newfoundland and Labrador, may still experience modest price gains, largely due to their comparatively stronger affordability and less reliance on high-leverage purchases.

Looking ahead to 2024, CREA anticipates a modest rebound in home sales, with a projected 9 per cent increase in transactions, bringing the market closer to its long-term growth patterns. The national average home price is also expected to see a 1.5 per cent increase, reaching $690,916. However, it is crucial to note that even with this projected increase, prices would still remain below pre-pandemic levels in real terms, suggesting a cautious return to sustainable growth rather than a rapid recovery. Alberta is once again forecasted to outperform other regions in terms of price growth, driven by its relative affordability and robust economy. In contrast, Ontario’s growth is predicted to be minimal, with other provinces experiencing modest price increases ranging from 1 per cent to 2.5 per cent. The overarching sentiment remains one of caution, acknowledging the economic headwinds that continue to influence the housing sector.

Affordability Challenges and Regional Disparities: What’s Next?

The Canadian housing market typically follows a cyclical pattern: high activity in the spring, a slowdown in summer, a pickup in fall, and another dip in winter. However, the current cycle presents a unique anomaly. Despite a rapid increase in new listings since Labor Day in September 2023, the market has not seen a corresponding rise in sales. This disconnect between supply and demand strongly indicates a widespread affordability crisis across the nation. Potential buyers, facing higher interest rates and elevated living costs, are simply unable or unwilling to enter the market, even with more inventory available.

As a direct consequence of this imbalance, the national sales-to-new listings ratio has sharply declined from nearly 70 per cent to 50 per cent in just five months. This dramatic shift has led to a significant slowdown in price growth, particularly evident in Ontario, a province highly sensitive to credit conditions. Given these weaker sales and pricing trends, coupled with the anticipation of “higher for longer” interest rates, the Canadian housing market could face a prolonged period of downward pressure or stagnation throughout the remainder of 2023 and well into 2024. This trajectory underscores a fundamental re-evaluation of home ownership prospects for many Canadians.

Key Forecasts and Provincial Performance:

• 2023 National Average Price: Expected to decrease by 3.3 per cent annually to $680,686.
• Provincial Impact: Ontario and British Columbia, being the most expensive and credit-dependent provinces, are experiencing the most significant sales contraction as interest rates (and thus credit costs) rise. The Bank of Canada’s decision to resume its rate hiking cycle, combined with rising Government of Canada bond yields, triggered this downward revision.
• Resilient Markets: Conversely, provinces like Alberta, Quebec, New Brunswick, Nova Scotia, and Newfoundland and Labrador are expected to see modest average price gains in 2023. These regions are somewhat insulated by their solid affordability, measured by price-to-income ratios, offering a stark contrast to less affordable markets like Ontario and BC.

Outlook for 2024:

• National Home Sales Rebound: Forecasted to rebound by 9 per cent to 490,257 units, assuming interest rates trend downwards and the market gradually returns to long-term patterns.
• National Average Home Price: Expected to increase by 1.5 per cent from 2023 to 2024, reaching $690,916. While this represents an optimistic scenario against the backdrop of a potential recession, it is still below the current rate of inflation. This means that, in real (inflation-adjusted) terms, Canadian homeowners might still experience a loss in property value, highlighting the economic challenges ahead.
• Market Stability: This period would mark the fourth consecutive year with the annual national average price hovering within the $680,000-$700,000 range, echoing periods of stability seen in the past, such as from 2016-2019 and throughout the 1990s.
• Provincial Performance in 2024: Alberta is projected to continue its outperformance, with a forecasted price gain of 4.8 per cent compared to 2023. Ontario, however, is likely to face minimal growth, estimated at just 0.2 per cent. The remaining provinces are expected to experience price growths in the range of 1 per cent to 2.5 per cent in 2024. These projections align with interprovincial migration trends highlighted in recent reports from RBC, which observe Ontarians increasingly relocating to more affordable markets, particularly Alberta and Nova Scotia, seeking better value and quality of life.

The Canadian housing market is clearly in a transitional phase. While the immediate outlook suggests continued moderation and a shift towards more balanced, or even buyer-friendly, conditions, the long-term trajectory will largely depend on the interplay of interest rates, inflation, and broader economic resilience. For both existing homeowners and prospective buyers, staying informed and adapting to these evolving dynamics will be crucial.