Photo: Stewart Butterfield/Flickr
After setting an all-time record for the month of April, Canadian home sales fell in May, the Canadian Real Estate Association (CREA) reported earlier this week. Month-over-month, residential real estate transactions sank 2.8 per cent, with sales activity falling in about 70 per cent of all Canadian markets.
Interestingly, lack of demand wasn’t the main cause of the overall decline. According to Gregory Klump, the CREA’s chief economist, inventory was the bigger factor in many areas.
“Many of the housing markets in BC and Ontario that led the monthly decline in national sales are also places where months of inventory have fallen to all-time lows,” he said, adding, “[t]his suggests a lack of supply may be starting to rein in sales amid a continuation of strong housing demand.”
That tightness pushed the benchmark price of a Canadian home up by 12.5 per cent compared to May 2015, to $550,000. The country’s sales-to-new listings ratio also increased, hitting 64.8 per cent — anything above 60 per cent is indicative of a sellers’ market.
We took a look at how three of Canada’s major banks reacted to the CREA data. Find out where their economists stand on the present and future of the country’s housing market.
- Economist Diana Petramala wrote that while Canada’s hottest housing markets — BC and Ontario — also have the best labour market outperformance in the country, employment gains aren’t the only factor driving the rapid housing price increases the two provinces have seen. As a result, market activity in those provinces may end up being unsustainable.
- Even so, Canadian housing prices are rising at a double-digit pace this year, with gains concentrated in BC and Ontario.
- While the current pace of Canadian housing demand is “unsustainable,” there doesn’t appear to be any way to curb it in the short term. Record-low mortgage rates are part of the issue, and next year rising rates may reduce demand somewhat.
- Foreign investment is a wild card, wrote Petramala, and “adds a significant layer of uncertainty around demand dynamics for Canadian housing.” Part of that uncertainty stems from the fact that it’s tough to predict what the recent appreciation of the Canadian dollar could mean for foreign investment.
Royal Bank of Canada
- Senior economist Robert Hogue said the fall in home sales in May should be viewed as a positive development for the Canadian housing market, describing it as a “welcome tentative sign that that the heat may be on its way to a more tolerable degree” in Vancouver and Toronto.
- However, if the upward pressure on housing prices in those markets is to be relieved, much more cooling is necessary.
- Alternatively, an increase in the number of homes on the market could reduce housing prices. That scenario seems unlikely though — fewer and fewer people have been putting their homes up for sale lately, perhaps because moving has been disincentivized by poor affordability, or “affordability stress.”
- This affordability stress could contribute to a soft landing in the Canadian housing market. RBC has long been calling for a soft landing, but expected it to come through the demand side.
- Canadian home sales are likely to hit a record this year. RBC is calling for sales of 551,000 units, which would be an increase of 9 per cent from 2015.
- Senior economist Adrienne Warren highlighted the “severe lack of listing[s]” in BC and Ontario, writing that in May the number of months of supply in those provinces came to just 2.7 and 2.3, respectively. The tightness in those markets is largely responsible for Canada’s elevated May sales-to-new listings ratio.
- With fewer homes available to buy, home sales have slowed in BC’s major markets and experienced “some levelling off” in the Greater Toronto Area. That suggests activity in those areas may be peaking; however, sales are likely to stay high for the time being.
- Meanwhile, home sales and prices are likely to remain low in Canada’s oil-producing regions, but market conditions there are showing signs of stabilizing.