On Tuesday, August 15, the Canadian Real Estate Association (CREA) released its national housing statistics for the month of July 2023. Below, CREA’s Senior Economist Shaun Cathcart provides an update on the current state of housing markets in Canada and explains what the data means for members:
The dog days of summer. Lots of people on vacation, not really paying much attention to the news, and that’s OK because there wasn’t much excitement in the July housing numbers.
Home sales levelled off in July, but we’ve seen that coming for a couple of months now. New listings are still rising rapidly. Given that we were at a 20-year low in April, though, it’s a good thing that they’ve normalized so quickly. Prices have arguably been rising too fast in recent months.
We saw 2% month-over-month price growth in April, May, and June, which is a lot. For a back of the envelope calculation, multiply 2% per month by 12 months to see the road to having another uncomfortably large year-over-year increase. The good news is that with markets becoming more balanced, that price gain was cut in half at an increase of just 1.1% in July.
I wrote last month about a summer slowdown in the market, and I think August sales will be down again from July. I suspect this will be in response to the Bank of Canada’s mid-July rate hike and messaging regarding above-target inflation for longer than previously expected.
We’re probably looking at another round of “back to the sidelines” for some buyers until there’s a higher level of certainty around interest rates.
New listings may continue to rise though perhaps not as fast. That said, keep an eye on this metric for signs that more people might be divesting from properties they feel they can no longer afford given current interest rates. Not a big feature of the market right now, but let’s keep an eye on it.
For now, we’re probably going to end up with a fairly middle ground sales-to-new listings ratio. That means price growth could moderate slightly more, but with the overall stock of active listings still very low I think prices will continue to tick higher, or at least not fall.
What happens beyond the next few months will depend on the outlook for interest rates. Uncertainty may keep sales lower for a time but, ultimately, demand for housing in Canada is still massive relative to supply.
In July, the Bank of Canada said it expects inflation to be stuck in the 3% year-over-year range until next summer before returning to the 2% target by mid-2025.
Some saw this as a hawkish statement but I’m not sure. The Bank had previously said 3% year-over-year inflation was not good enough for them. So, in saying it will get stuck in the 3% year-over-year range until next summer are they not, in fact, saying they are going to let it stay there longer by not attacking it with any more rate hikes?
If so, it’s a different type of messaging from the Bank. I think we’ll probably get some more clarity on that in September.
One thing to note about the last year-and-a-half of rate hikes is that real interest rates only turned positive (that’s when the Bank of Canada’s overnight rate is higher than year-over-year inflation) within the last few months.
So, we may see the impact of all that policy tightening, which has been lagging, start to really bite later this year. The Bank of Canada’s Governing Council discussed this in advance of their most recent decision.
As much as the bank has worried about under-tightening interest rates all along (they do not want a repeat of the 1970s), the prospect of over-tightening is also now front and centre.
The forecast is currently predicting a smooth two-year long cruise back to normal for inflation, typical for a forecast; but that type of thing almost never plays out in real life.
It’s been said that “all forecasts are wrong, but some are useful.” I guess for now the usefulness of the Bank of Canada’s most recent forecast is that they’re becoming increasingly skittish about having to raise rates any further.
The next Bank of Canada policy decision and announcement is on September 6. Grab your popcorn.
