“Correction” at Canada’s real estate market – what stage are we on?

Canada’s real estate market has been facing some serious turbulence: record low interest rates during the pandemic pushed prices and sales to extremely high levels, then the central bank’s rate increases since March caused equally shocking consequences.

No wonder that in July, RBC economists expected a historic correction (prices decline).

CIBC economists Benjamin Tal and Katherine Judge took a closer look at the drastic changes at the national housing market. Their report includes a few records seen during this downturn and a few findings you might not know about.

Housing sales had been falling for eight consecutive months before showing a small increase in October. It’s both the longest period of sales declines on record and the sharpest one, the CIBC team says. “And it’s not the end”.

Home prices are also showing record numbers, with the average price going down by 20% since February – this is already the strongest correction. However, Tal and Judge say it’s also important to look at the numbers from different angles. For instance, if we look at the drop from the perspective of how high prices rose before the correction, this decline will be the softest of the five housing downturns since 1981.

Another factor affecting the results is the way you measure prices. According to Tal and Judge, the average home price index can be misleading as it averages all prices and doesn’t take into account the composition of the home sales. It means that if more of less expensive properties are sold it can lead to a decline in the index even amid growing prices.

They rely more on the Canadian Real Estate Association composite index which measures price changes in similar property categories. A comparison of the two numbers shows that almost half of the 20% decrease in average prices since February is caused by the composition of sales, as it reflects lower sales of expensive homes. Economists say detached houses saw the largest decline, while condos – the smallest.

One more issue affecting the downturn is the lack of new listings. CIBC says although the current supply is twice larger than during the pandemic, we still haven’t returned to the pre-pandemic levels. Toronto and Vancouver are already back to pre-pandemic numbers, but the supply remains below the long-term average.

According to the economists, sellers are still waiting and there are no signs of distressed selling so far. “The atypical behaviour of supply this time has reduced the magnitude of the price drop,” – they noted.

Re/Max says 60% of Canada’s real estate markets are expected to be balanced by 2023 as sales and prices go down. Their estimates show that the Greater Toronto Area, Greater Vancouver Area, Calgary, Regina and Winnipeg are already in balanced markets, while Ottawa, Montreal and Halifax are still considered to be sellers’ markets.

 

 

 

 

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