The February national housing numbers are in, with the data hinting at an early spring recovery for the rate-hike-walloped market.
According to the Canadian Real Estate Association, while home sales remain 40% below February 2022 levels with 29,569 transactions, they’ve ticked up 2.3% from January, returning more in line with activity with the 2018 and 2019 market. In fact, this will be the last month where market conditions will be compared to a pre-rate-hike environment and pandemic-induced demand anomalies, with last February marking the all-time peak for prices and sales.
While a January-to-February improvement is seasonally typical, it also indicates motivated buyers, who have been sidelined due to high borrowing costs, are starting to come out in force.
And moving forward, the months to come should provide us with a clearer picture in terms of how today’s buyers are absorbing the higher interest rate environment; March 2022 marks the start of the Bank of Canada’s rate hiking cycle, which saw the central bank increase the benchmark cost of borrowing a historic eight times, from the pandemic low of 0.25%, to 4.5% in January 2023.
This small month-over-month improvement is also being reflected in the average national home price, suggesting the bottom may be in. Though lagging last year’s all-time record by -18.9%, the average price is up 1.7% from January, at $662,437– a difference of more than $50,000. According to CREA, much of the price recovery has been concentrated in the Toronto and Vancouver markets; excluding these two would strip almost $135,000 from the national average.
The MLS Home Price Index (HPI), which strips out the high and low extremes in the market, fell -1.1% on a monthly basis, which is just half the decline recorded the month before, and down -15.8% from the February peak.
Lack of supply puts pressure on home prices
However, supply continues to be a top concern, with the number of new listings falling by 7.9% from January, led by double-digit declines in several large markets, including Ontario. That’s amped up the competition for the buyers who are out there, pushing the sales-to-new-listings ratio up to 58.4%. That’s the tightest since last April, and re-approaching sellers’ market territory; CREA considered a ratio between 40- 60% to be balanced, with below and above that threshold to indicate buyers’ and sellers’ conditions, respectively. The long-term average for the measure is 55.1%.
The number of months of inventory – the amount of time it would take to sell off all available homes for sale – sits at 4.1, down from 4.2 last month. That’s a full month below the long-term average, says CREA, and is also the first sign of tightening seen since the fall.
“The similarities between 2023 and the recovery year of 2019 continued to emerge in February, with sales up, the market tightening, and month-over-month price declines getting smaller,” said Shaun Cathcart, CREA’s Senior Economist. “But the biggest similarity was a sharp drop in seasonally adjusted new listings. Future sellers, many of whom will also be buyers, are likely biding their time until the optimum time to list and buy something else. For most, that’s in the spring. Will buyers jump off the fence to snap homes up in 2023 once they finally start to hit the market? They did in 2019.”
Adds CREA Chair Jill Oudil, “February’s data contained the potential of a more robust market to come, but to repeat the bottom line from last month, we won’t know what the 2023 market has in store until the spring. While we’re not seeing it in the sales or listings data just yet, I would expect homeowners are getting properties ready for the market and prospective buyers are getting mortgage pre-approvals.”
The bottom line
However, Oudil’s comments don’t capture the rapidly changing mortgage market narrative, following the default of two American regional banks; the seizure of both Silicon Valley Bank and Signature Bank by the US banking regulator has roiled markets, raising the possibility the US Federal Reserve will need to hold or cut its trend-setting interest rate (and by extension, the Bank of Canada’s Overnight Lending Rate). That has caused bond yields to drop, putting heavy downward pressure on fixed mortgage rates.
Should these economic factors continue to play out, that could spell lower mortgage rates for Canadians much sooner than expected. Given the pent-up demand among buyers, any improvement in affordability will fuel market activity and put upward pressure on home prices.