Why Are Prices Still Soaring in Canadian Real Estate Markets?

Is the mainstream media betting on a collapse of the Canadian real estate market? For months, the Fourth Estate has been covering the inevitable correction and perhaps even a future downturn in the red-hot Canadian housing market. Whether it is speculating on what impact an increased mortgage stress test would have on real estate, or reporting on price growth hitting a peak, it seems like everyone, except maybe sellers, is anticipating a housing crash at any moment.

Canadian real estate prices are not skyrocketing at the pace seen earlier this year, but valuations are still climbing and supporting the country’s post-pandemic economic recovery. According to the Canadian Real Estate Association (CREA), the national average sale price edged up 0.9 per cent month-over-month in June, and the national average sale price recorded a 26-per-cent gain to finish the spring and begin the summer. Overall, the typical price for a home in Canada is $679,000.

Is there more growth in store, or will prices start to tumble? Over the next 12 months, there will be many factors at play that could either bring the market into balance or potentially add to the monumental gains.

Why Are Prices Still Soaring in Canadian Real Estate Markets?

Many key performance indicators are pointing to the same conclusion: the housing market is cooling from coast-to-coast, and the spikes reported in every corner of the country have reached a zenith. With buyer fatigue, demand exhaustion, a more rigorous stress test, and a rate hike on the horizon, it would make sense that prices could begin to ease, giving homebuyers a bit of a break.

Since March 2021, this is how each provincial real estate market has performed, suggesting a blend of deceleration, acceleration, and stagnation:

• New Brunswick: -5.8%
• Alberta: -2.6%
• Ontario: -2.6%
• Saskatchewan: -0.6%
• British Columbia: +0.1%
• Prince Edward Island: +0.5%
• Quebec: +1.2%
• Manitoba: +1.8%
• Nova Scotia: +2.6%
• Yukon: +7.1%
• Northwest Territories: +8.5%
• Newfoundland and Labrador: +9.3%

Does this mean the turbocharged explosion of sky-high prices is over? Not quite.

But CREA is forecasting that prices will still advance by 19.3 per cent this year, up from the previous outlook of 17 per cent. If accurate, this would surpass the 13-per-cent growth achieved between 2019 and 2020. According to the Association, the same trends from the pandemic real estate boom last year are fuelling the post-crisis surge this year, particularly in relation to widespread supply woes.

The number of new residential listings slipped 0.7 per cent month-over-month in June. The national sales-to-new listings ratio was 69.2 per cent in June 2021. The number of months of inventory stood at 2.3, below the long-term average of about five months. The seasonally adjusted annual pace of housing starts tumbled 1.5 per cent to 282,070 units in June.

Scotiabank economist Jean-Francois Perrault has also noted that the pace of housing construction has failed to keep up with the pace of immigration, leading to a declining ratio of housing units to population. This issue appears to be confined to Canada, since the ratio is the lowest of any G7 nation. The solution? Canada needs close to two million homes to match the population.

Growth in the country’s big cities is all but guaranteed at this point. A lot of the uncertainty has been concentrated in the smaller towns and rural areas, which have skyrocketed 30 per cent and 56 per cent, respectively, from a year ago. Lower mortgage rates, move-up buying trends and escalating remote work are still expected to contribute to these regions’ growth.

“It’s a long road to get back to normal, and for many housing markets the main issue is that supply shortages are as acute as ever,” said Shaun Cathcart, CREA’s Senior Economist, in a news release. “At the same time, the break we’ve had on the population growth side of things is likely now coming to an end. So while the frenzy and emotion of earlier in the pandemic seem to have dissipated for now, the key ingredients of a seller’s market are all still in place. Housing has been a major election issue before and it will be this time around as well. The difference this time will likely be a focus on getting more housing built in the years ahead, so at least we’re finally having the right conversation.”

Would a Slowdown Hurt Canada’s Recovery?

The Bank of Canada (BoC) has acknowledged that the real estate boom has supported the nation’s economic recovery. But if increasing sales and prices have lifted the housing market, would a slowdown hurt the recovery? Canadian Imperial Bank of Commerce economist Royce Mendes recently stated in a report that cooling prices would not decimate the gross domestic product (GDP), although it might soften economic growth.

“Now that Canadians are leaving their homes more often, demand for housing is cooling off after a period of historic strength. As a result, we do expect this component of GDP to come back down to earth,” Mendes wrote. “So, while the cooling in market activity will dent the incomes of agents and the profits of brokers, it probably won’t meaningfully delay a return to full employment.”

It should be a compelling 12 to 18 months in Canada as the BoC raises interest rates, professionals return to the major urban centres, and the nation continues to adjust to a post-COVID-19 normal.

Sources:

• CREA
• CTV News
• CBC
• Financial Post
• CMHC