State of Canada’s Housing Market, April Recap

Written by Breck Hapner

On April 14th, the Canadian Real Estate Association (CREA) updated their 2023 housing forecast. The original CREA forecast came out in January, but due to increased sales activity, buyer confidence, and prices over the last three consecutive months for most markets in Canada, CREA issued a revised report.

Of particular significance in the CREA report was the impact of low available inventory and the lack of sufficient new builds. In the report, CREA cited these issues as a definable risk: “A worsening of Canada’s housing supply issue faced across the entire continuum including in the existing home market. New listings have been dropping fast and are currently at 20-year lows.”

Haven asked MaxWell Realty agent Lee Edwards and Calgary Real Estate Board (CREB^®) Chief Economist Ann-Marie Lurie about their thoughts on multiple issues facing and impacting Canada’s housing market, including lack of inventory.

“We are seeing challenges with inventory. The pandemic and low interest rates created a surge in demand, driving down supply,” Lurie said. “Over the short term, limited supply relative to the demand can drive up prices. Long term will depend on how much supply is added to the market. Keep in mind that we could see the new home sector ramp up construction adding the needed supply to the market.”

“Demand certainly drives both new and resale markets,” Edwards said. “However, as long as there is inflation, then the prices of new homes, which are basically driven by cost, have an effect on valuations of resale properties. This relationship is not direct, i.e., the 10 percent increased prices of new homes does not directly translate to 10 percent increase in valuations of resale properties.”

Whether from new sales, resales, or new build activity, this doesn’t seem to be a problem easily remedied or quickly solved without added transactions. “It takes quite a while for new homes to add significant inventory (more so at the moment because of supply chain issues) while resale activity is more immediate,” Edwards said. 

In addition to the inventory and new build problems, there is more to question. This is where things get a bit tricky, because the new CREA report home pricing data doesn’t necessarily jive with statistics derived from recent market conditions. Experts are pointing out the pricing discrepancies in the report but agree with the other economic (inflation/recession), financial (rate), and market (inventory) predictions.

What else is CREA saying in their updated housing market forecast? According to an April 14th, 2023, CTV News article, CREA “expects the average price of a home to end the year 4.8 percent lower than 2022 but says prices will rise by roughly the same amount in 2024.” 

Keep in mind that last year’s prices were inflated during the first four months of 2022. Therefore, the year-over-year (YOY) data, at least up to April, is going to look very negative. This may be why CREA is forecasting downward home prices: a “play it safe” strategy. It will be interesting and enlightening to see if the May, June, and July 2023 YOY numbers are still negative or if positive statistics emerge, as the Canadian housing market suffered during these months in 2022. 

CREA went on to say that their 2023 home price prediction “amounts to an average price of $670,389 this year and $702,214 next year, when prices are expected to increase by 4.7 percent.” So, this year, Canada’s housing prices are expected to decrease by almost five percent, and then in 2024, the market is expected to go up almost five percent. Therefore, housing prices are predicted to end up in the same spot overall. 

 But what about sales data? According to the report, “the board also foresees home sales falling 1.1 percent to 492,674 this year and then rising 13.9 percent to 561,090 in 2024.”  These all seem to be reasonable predictions because recent data suggests the worst is past. Experts say that if rates hold until the end of this year, consumer confidence will rise, new buyers will enter the market, and sales will rise, despite sobering economic and financial considerations. 

This reasoning was echoed in the report. According to CREA chair Jill Oudil, “As the spring market heats up and it looks as though some buyers are coming off the sidelines, it’s important to remember that the intense market conditions of recent years have not gone anywhere, they’ve just been on pause.” Obviously, it has been the incredible rise in interest rates that have put the market on pause. Oudil does acknowledge positive forces recently at play in the Canadian market. “In recent months, the rate has been held twice in a row, prompting some eye purchases once more, while prices are still low,” said Oudil.

To further back up Oudil’s observation, examine the Canadian bond market via MarketWatch, which fluctuates daily and chiefly prices mortgage rates. As you can see in the 3-month setting (use dropdown next to “Advanced Charting”) looking at last month (hover cursor over graph for pop-up data), the 5-year bond was at 2.943 percent, and as of May 5, 2023, it has risen slightly to 3.021 percent. This is fairly close to one month ago, showing that mortgage interest rates have steadied, with no big fluctuations up or down like the Canadian market has experienced over the last 18 months.

Why is this important? The issue of higher mortgage rates is often misunderstood or downplayed when discussing the homebuying process. Certainly, it is of paramount importance to the health of the market, because buyers are often forced to consider lower-cost housing options, which affects market viability. “There is no question higher rates have impacted what people can afford,” Lurie said. “Buyers are also facing the additional challenge that supply levels are declining at a faster rate for lower priced properties.”

This thought is echoed by Edwards. “Increased mortgage rates, especially combined with the stress test, reduces the buying power. Typically then, buyers focus on less expensive properties,” Edwards said. “This becomes an interesting conundrum. With prices going up (inflation for new properties, inventory supply issues with resale) and buying power going down, this shifts attention and activity to lower priced properties.”

However, recently, interest rates have gotten slightly cheaper, and the bond market yields haven’t fluctuated, which would force change to the cost basis for interest rates. This is good news. Financial institutions have also become more competitive, causing interest rates to decrease slightly across many lenders. But the disparity between financing higher-priced versus lower-priced properties remains.

“Calgary’s condo market, which has been ‘soft’ for 15 years, is currently very strong. Units are selling in a day or two with very often multiple offers. For instance, I sold a townhouse to a couple coming here from Ontario. We wrote 7 offers over a 10-day period until we were successful,” Edwards said. “One thing we are finding is that attention is shifting to markets further away from the major urban centers where typically property is less expensive. But the new pressure on lower priced properties is diminishing the activity, and value, of higher priced properties.”

In addition to the impact of rates on property values, other key takeaways from the CREA report focus on three specific market factors. The first is immigration to Canada, which Laurie admits is an essential element. “Recently we have also seen levels of migration that have been exceptionally strong relative to new home construction,” Lurie said. “This has left the market with supply challenges. This recent rise has driven vacancy rates down and is impacting supply in the broader market. Ways to address this is to increase the supply of housing through new construction.”

Immigration numbers are expected to be high, raising questions about housing availability, especially in markets exhibiting low inventory. “Basically, increased population is primarily accommodated by expanded inventory, i.e., building additional residential units,” Edwards said.  “Increasing the supply through new construction is the answer. However, new construction is often a ‘pendulum’ with developers and builders ramping up production too much, then having an oversupply, correcting prices but, more importantly, cutting back on production, then needing to ramp up production again, and so on. It ultimately depends on population growth. If population growth were ‘constant’ then activity and prices would be consistent and more in-line with inflation.”

The second key factor will be interest rates. Will the Bank of Canada join the U.S. Federal Reserve in raising rates, and what will the five-year bond yield look like in the next six months? And the third pillar is the unemployment rate in specific markets across Canada. More job losses are expected this year, such as those already seen in the tech sector, although Canada has also experienced much unanticipated job creation.

How did CREA come to its conclusions about falling home sales and pricing during 2023? The CREA data seems counterintuitive to what the Canadian real estate market has been experiencing for the past few months. So, what does the recent evidence say? To gain some insight, let’s take a look at what has been going on in some of Canada’s top markets.

Now that Canada’s spring real estate market is underway, it appears homes are selling faster for more money and more often. And although sales numbers are nowhere close to what they were last year, it appears the Canadian real estate market has finally begun to ground itself. This all comes as consumer sentiment finally seems to be taking a turn for the better with general expectations that Canadian real estate values are going to increase.

Now, let’s jump over to Vancouver. On April 4th, 2023, The Globe and Mail posted an article by The Canadian Press that stated March 2023 home sales fell 42.5 percent from one year ago, which is 28.4 percent below the 10-year seasonal average. The benchmark price is down 9.5 percent from last year, but it is up 1.8 percent compared to February. 

For the Calgary market, on April 3rd, 2023, yahoo!finance posted an article by The Canadian Press, which states that the Calgary housing sector saw the lowest March inventory since 2006. This exuberance isn’t presented at the moment with the number of home sales down about 40 percent compared to March of 2022, but the benchmark price is up almost one percent year-over-year. 

Moving into Toronto, you can see in this April 5th, 2023, Bloomberg report that prices rose for a second month as the market tightened due to less homes available to buy. If we take a look at the numbers, this is where it gets really interesting for the Toronto market. The benchmark price for a home in Canada’s largest city climbed 2.5 percent to $1.12M in March from a month earlier. 

As you can see, there is a very consistent theme displayed by markets across Canada. They are all down about 40 percent in the number of transactions but up slightly from the previous month. What this signifies is a level of resistance in the market despite negative forces outlined in the recent CREA report. 

Barring anything unforeseen, such as bad economic circumstances and/or further interest rate increases, the data suggests that many regions of Canada’s real estate market have found a floor for 2023 and may be entering a process of eventual recovery through a combination of lower-priced choices, resale properties, and new construction.  

“For buyers, they may need to expand their scope in terms of affordable housing options,” Lurie said. “For sellers, it depends on whether they are buying and selling in the same market—and if they are a move-up buyer or if they are trying to downsize.”

Edwards sees a combination of new and resale homes to be the definitive answer to current market inventory and pricing issues. “Resale can go up significantly while more new homes are being built, then stabilize or even correct (depreciate) for a while, while the emerging supply of new homes becomes an alternative.”

In our May recap, Haven will take a further look at the numbers: how Canada’s current housing market is reacting to prevailing economic factors influencing real estate.