Canadian Real Estate Sales and Prices Plummet, Experts Warn It’s Just Getting Started

The Canadian real estate boom is dead and experts see an inevitable correction. Canadian Real Estate Association (CREA) data shows home sales dropped in April. Higher mortgage rates and unsustainable prices have vaporized demand, as markets adjust. As big as the drop in demand was last month, economists think we’re just getting started.

Canadian Real Estate Sales Are Down 21%

Canadian real estate sales have slowed but took a sharp turn last month. Seasonally adjusted home sales fell 12.6% in April and were 21% lower than last year’s record high. Falling home sales in Toronto, the country’s largest market, were a big contributor. But 80% of markets showed a drop in sales, so this is a broad issue likely due to the breaking of a speculative mindset.

Canadian Monthly Home Sales

Monthly existing home sales through the MLS.

Source: CREA; Better Dwelling.

Canadian Real Estate Sales and Price Drops Are Just Getting Started, Warns BMO

Canadian interest rates are just off record lows but home sales are still falling. It’s too early for interest rates to have throttled borrowing already — except in a bubble. In a bubble, homebuyers are driven by emotion and pay an emotional premium. Throttling credit takes 18 to 24 months but throttling emotion only takes a few moments. In this case, higher interest rates appear to have broken the speculative mindset.

Canadian Home Sales: Annual Growth

The 12-month change in home sales across Canada.

Source: CREA; Better Dwelling.

“The demand fever in Canadian housing has broken and, who would have thought, all it took was a nudge in interest rates by the Bank of Canada to change sentiment,” quipped BMO senior economist Robert Kavcic. For the past year he argued that this was a case of speculative demand, not a shortage in supply. 

“When we speak of housing correction it’s not a question of if, but where, how much and for how long?,” he explained.

BMO warns Ontario’s suburban market is the “shakiest” and particularly vulnerable. Markets with less exuberant valuations will hold up better, they suggest. However, “… the jump in mortgage rates will still be tough to power through,” they warned the bank’s investment clients.

How much will prices fall? “Let’s say that we’re just getting started,” he warns.

The overnight rate has only increased 75 basis points (bps) and things are starting to slow. It’s already hitting buyer psychology, says BMO, and higher rates have barely begun. The bank expects another 100 bps of hikes by the end of July and another 125 bps by the end of the year.

“That effectively means that the market will go from being priced at mortgage rates of roughly 1.5%, to somewhere in the 3.75%-to-4.5% range, depending on how bond yields evolve,” he warned.

The time the correction will take depends on the economy and when inflation slows. According to Kavcic’s research, home prices take 2 to 3 years to bottom and 4 to 5 years to retrace where they were. That timeline is consistent with the forecast shared by Capital Economics last week.

RBC Welcomes A Housing Correction, Just Not A Meltdown

RBC also sees housing demand cooling across Canada, and called it “a welcome correction…” The bank explained the market is past its peak and expected to continue to cool in the coming months. 

“We think the sizable drop in activity in April marks a turning point for the Canadian market with further cooling on the way,” explains RBC senior economist Robert Hogue.

“The Bank of Canada’s setting out to aggressively normalizing its monetary policy is a game-changer for the market—turning what has been a tremendous tailwind into a stiff headwind for the market.”

Canadian Real Estate Is On Track To A “Sustained Cooling,” Warns Desjardins

Still not convinced? Desjardins also sees Canadian sales and prices slowing. The financial institution also attributes the slowdown to the normalization of monetary policy. As rates rise, it’ll cool the excess demand seen recently. 

“If April’s decline in existing home sales and prices is any indication, we seem to be on track to a sustained cooling in the Canadian housing market as a result of higher borrowing costs,” said Randall Bartlett, Desjardins’ senior director of Canadian economics.

They also see the trend just getting started. “With further interest rate hikes expected and some markets in towns and smaller cities continuing to be well out of balanced territory, we anticipate that we haven’t seen the end of housing market weakness in Canada,” he said.

Low interest rates sent Canadian real estate demand and prices soaring. Cheap money essentially flooded the market to stimulate the record level of demand. As high inflation forces interest rates to remove stimulus, demand is being vaporized. This is helping to restore balance to the market, as investors step back and weigh on whether this is a temporary or medium-term issue.