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"Higher for longer" rate expectations slow national sales in September

September 2023 CREA update

So much for the seasonally busy fall market – Canadian home sales dropped for a third month in a row in September, with activity coming in -1.9% below August levels and the year-over-year gap further narrowing.

A total of 35,116 properties traded hands over the course of the month, coming in 1.9% over last year’s number, but a drop from the 5.3% annual lead recorded last month.

According to the Canadian Real Estate Association (CREA), the national sales number was pulled down by declines in the Greater Vancouver and Toronto areas, offsetting interests in Edmonton, Montreal, and Kitchener-Waterloo.

New supply also continued to return to market, with 78,202 homes listed – a 14.2% increase from September 2022, and up 6.3% from the previous month. That’s brought new listings levels back to average, says CREA, with availability properties up a cumulative 35% from a 20-year low in March.

However, the national average home price still came in higher on a year-over-year basis, up 2.5% to $655,207, though it remained flat from August. Compared to the historical price peak recorded last February, the national average price is down by -$161,513, or -19.7%. Meanwhile, the MLS Home Price Index (HPI) edged down 0.3% on a month-over-month basis in September 2023 – the measure’s first decline since March. 

Rate-shy buyers are sticking to the sidelines

Uncertainty around the future of interest rates, coupled with constrained affordability, is the main factor behind September’s soft numbers says Shaun Cathcart, CREA’s Senior Economist, as buyers remain poised on the sidelines.

"Resale housing markets have settled down pretty quickly following this spring’s brief and somewhat surprising rebound in sales and prices,” he states in CREA’s release. 

“With the inventory of homes for sale still historically low amid huge demand for housing in Canada, what happens next will depend on interest rates. Whether that means uncertainty about the possibility of further hikes, or just the cost of borrowing money right now, neither of these will be resolved for would-be buyers anytime soon. As such, expect a quieter than normal winter with all eyes on the Bank of Canada. We’ll see how buyers are feeling when the snow starts to melt.” 

​​“The recent trend of slowing sales and rising new listings continued in September,” added Larry Cerqua, Chair of CREA. “This presents an opportunity for buyers, although many of them seem content to stick to the sidelines until there’s more evidence that interest rates are indeed finally at the top. This, combined with sellers who, by and large, do not need to sell, means the market will likely remain on the slower side until next year.” 

Overall months of inventory – the amount of time it would take to completely sell off all available homes for sale under current market conditions – rose to 3.7 months from 3.5 in August, and up from the recent low of 3.1 in June. However, CREA points out, that remains well below the levels recorded through the second half of 2022 and the long-term average of about five months. 

As sales continued to trend lower than the number of newly-listed homes, competition cooled slightly among buyers, with the sales-to-new-listings ratio (SNLR) dipping to 51.4% from 55.7% in August. According to CREA, it’s the first time that this measure has fallen below its long-term average of 55.2% since January. The association uses this metric to gauge the level of competition within the market; a ratio between 40 - 60% indicates balanced conditions, with above and below that threshold reflecting sellers’ and buyers’ markets, respectively.

The most recent peak for the SNLR was in April, when it hit 67.8%.

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CREA updates forecast on “higher for longer” rate expectations

While the Bank of Canada’s aggressive hiking cycle is anticipated to wrap up in coming months, the fact that rate cuts aren’t expected until at least the latter half of 2024 has prompted CREA to readjust its sales and home price growth forecast for the remainder of this year and next.

The fact that housing activity has failed to rally this fall is indicative of uncertainty among buyers, who aren’t keen to make a move in today’s higher interest rate environment.

“In a typical year, housing markets tend to be most active in the spring,” states CREA. “This tends to wind down over the summer, but there’s often a bit of an uptick in the fall. That has certainly been true on the new listings side since Labour Day; however, this influx of new supply has not led to an uptick in sales.”

CREA notes that the national sales-to-new listings ratio has fallen from near 70% to 50% in the span of just five months, while the rally in prices has slowed markedly, while reversing altogether in Ontario.

CREA’s new forecast now calls for a total of 449,614 home sales in 2023, which would mark a -9.8% decline from 2022. Sales will then rebound by 9% to 490,257 units in 2024 as interest rates start trending lower. “This forecast would place activity close to the pre-pandemic 10-year average, below levels recorded in 2007, 2015, 2016, 2017, 2019, 2020, 2021, and 2022,” CREA writes.

The national average home price is expected to drop by 3.3% on an annual basis to $680,686.

“This is down from CREA’s previous forecast, owing primarily to the compositional impact of lower sales in Ontario and British Columbia, by far Canada’s two most expensive provinces for real estate. Provinces forecast to see small average price gains this year include Alberta, Quebec, New Brunswick, Nova Scotia, and Newfoundland and Labrador,” the association states.

Prices are anticipated to remain largely flat over the next year, forecasted to increase just 1.5% from 2023 to 2024, at $690,916, with Alberta leading the way in terms of price gains – the wild rose province is on track to see prices rise 4.8%, compared to zero growth in Ontario and modest price growth in the 1% to 2.5% range is forecast for other provinces in 2024. 

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