The big question now is how fast are we going to tumble down that mountain.
Good Morning!
It’s been a wild pandemic ride, but some economists are now saying that the torrid run of Canada’s housing market has already peaked, and it’s downhill from here.
“March seems to have been the absolute peak of the mountain in terms of activity, a couple of months ahead of what we had anticipated in our outlook released last winter,” writes TD economist Rishi Sondhi in the report “Canadian housing outlook: Comin’ down the mountain.”
The big question now, says Sondhi, is how fast are we going to tumble down that mountain.
Canadian home sales have dropped 25% since March. Sounds like a lot, right? But considering the “stratospheric” spike seen in the first quarter, sales are still remarkably strong even after this decline.
Sondhi said that if the June sales figure continued for the whole year, more than 600,000 units would be sold, beating 2020’s record.
Beyond the fact that the pandemic housing market was unsustainable, there are a few factors that could contribute to how fast it falls.
Tighter stress test rules that began June 1 is one thing that may weigh on buyers.
Another is bond yields, which TD expects will rise through next year. Yields have pulled back in recent weeks over concerns about the Delta variant of the COVID-19 virus and its economic impact, but economists don’t expect this to last long.
“As the global recovery remains resilient and inflation forecasts continue to be nudged upwards, an upward trend in bond yields will likely reassert itself, taking mortgage rates along for the ride,” said Sondhi.
TD only expects a modest increase in borrowing rates with the Bank of Canada hiking once in 2022 (in the second half) and 5-year government bond yields rising by about 110 basis points by the end of 2022. But it cautions that even a quarter point increase will have a bigger impact in today’s pricey market.
The higher markets flew during the boom, the harder they will fall. Home sales have dropped 32% in Nova Scotia year to date, 20% in Quebec, and 17% in Ontario, Sondhi said. Meanwhile, home sales in the more affordable Alberta have climbed 13% year to date, the best performance in the country. TD expects this trend to continue this year and next.
Average home prices have also slipped, but TD thinks one reason behind this is that condos are now taking a bigger share of sales. Higher sales of these cheaper units should keep home price growth in check. This is the opposite of what happened earlier in the pandemic when the rush for more expensive detached homes pushed average home prices up.
Looking ahead, TD expects home price growth to strengthen in the affordable Prairies and Newfoundland and Labrador and weaken in Ontario, Quebec, PEI and Nova Scotia.