CA - Would-Be Home Buyers Are Stepping Back In The Market But Finding Limited Supplies
2023-04-18 22:15:00 ET
Summary
- Has Canada's housing market hit bottom?
- Why supplies of newly listed homes remain at a 20-year low.
- How buyers are starting to make their way back into the Canadian housing market.
Home sales in most markets across Canada have been rising in recent months, suggesting to some that the housing bottom has either been reached or is at least in sight. Rishi Sondhi, Economist at TD, tells Greg Bonnell even as buyers return, supplies of newly listed homes remain low.
Transcript
Greg Bonnell: After a year of aggressive interest rate hikes, which have weighed on home prices, we do know that the Bank of Canada is on a conditional pause. What could it all mean for the housing market now that we're heading into the spring selling season?
Joining us now to discuss, TD economist Rishi Sondhi. Rishi, always great to have you on the program. Welcome back.
Rishi Sondhi: Thanks, Greg. Thanks for having me.
Greg Bonnell: All right. So as people try to figure out perhaps where this housing market is headed after the pressures of the past year, we did get some fresh data just before the weekend about existing home sales in this country. What are the big takeaways from that?
Rishi Sondhi: Well, demand-- sales increased for the second consecutive month, or about 1.5% month-on-month, which is a positive sign there. On a three-month moving average basis, sales are flat. So it looks like Canadian home sales are hitting a bottom, which is good news for, for example, homeowners.
Average home prices are up 2% month-on-month. They are actually up a little bit on a three-month moving average. This is Canadian average home prices. So it very much looks like sales and prices are hitting a bottom after a fairly lengthy correction.
I would say a big overarching story over the past couple of months has been supply or lack thereof. So new listings were down about 6% month-on-month, the second straight I would say big drop, big monthly drop.
So when there's less available supply, that does weigh on sales, because there's fewer homes out there to purchase. But what it also does, it tightens markets. It creates an environment where it encourages multiple bid opportunities. So really the pullback in supply is an important factor that's generating that positive average price growth, by virtue of the fact that there's just not that much supply in the market.
Greg Bonnell: There's a lot of conversation, Rishi, in this country about building homes to meet the demand there. But we're talking about existing home sales. So this is an interesting dynamic where you're just not seeing these existing homes put on the market. What's happening there? Why do we think maybe that homeowners are a little reluctant to come to the table right now with their properties and put them up for sale?
Rishi Sondhi: Well, you got to understand that the market is only in its nascent stages of recovery. It's probably going to take a few more months of positive sales and price growth before buyers-- or sellers, I should say, excuse me, have the confidence to list their properties. That's one factor.
Another factor is that it's possible that some sellers have expectations that they'll get the prices that were prevalent last year, or something in that ballpark. And I would say that's a bit of an unrealistic expectation at the moment, given that we've seen such a steep price decline. So there may be some hesitancy on the part of sellers simply because they're not getting those prices that they think they should get that looked like what we saw last year. So those are a couple of factors we think that are at play.
Another factor that we've got to consider that's rumbling in the background and will continue to exert downward pressure on listings is the fact that Canada's population is aging. And an aging population tends to move less anyways. So over time, you're just going to see a structural downward pull on new supply, on listings, simply due to that aging factor.
And another structural factor I'll point to is the fact that it's taking us a longer time to complete units that we start across all structure types. So it's taking longer for us to complete units and put them on the market. And I think that's a longer term structural factor that's holding down listings as well.
Greg Bonnell: All right, so we've got a dearth of supply in terms of people actually listing their existing properties for sale. We do have a central bank, after a year of aggressive rate hikes, that is on pause. It's a conditional pause, but we've gone through two meetings now where they haven't changed their key rate.
How does this all play into the summer market? A tight market, but yet if compared to a year ago, if people think they're going to get the price that they got a year ago, well, the cost of borrowing has moved pretty dramatically from that.
Rishi Sondhi: Right. Well, I would say it's a supportive factor for demand actually in prices. The Bank of Canada is on hold. And that sends a fairly strong signal to people that perhaps they're done the right hiking campaign and that the market, or the bottom of the market, is coming.
And it creates a bit of an incentive to jump on the market now and gain some appreciation on the upside there. So we think that the pause has actually jolted, I would say, buyer psychology and help some buyers come off the sidelines a little bit. So that's helpful.
Greg Bonnell: And to a certain degree when I read all the coverage of the Canadian housing market, or even I think of it from an investor perspective apart from housing, you do have a certain amount of investors counting on not only a pause but then cuts at some point before the end of the year. The bond market is trying to price it in, figure out where the Fed might be, where the Bank of Canada might be.
Is some of that creeping into the housing market? Is there a certain contingency perhaps that thinks that rates are going to start moving lower before the end of the year?
Rishi Sondhi: Yeah, I mean, definitely, right. You see that showing up on bond yields. And bond yields, of course, impact fixed mortgages.
In the Bank of Canada's latest Monetary Policy Report, they had an interesting chart showing the share of people taking, let's say, two to four-year mortgages out as opposed to the more historically popular five-year fixed mortgage has been on the rise, right, which means that people think that interest rates are going to fall within the next few years. Right?
So we've seen rates come down across the curve. And our forecast anticipates that rates on the shorter end there-- I'd say the two-year yield, for example-- are going to fall more than in the five-year space. And that's helpful for in this market where people are taking out those shorter-term fixed rate mortgages.
Greg Bonnell: Something I've been told in normal times-- and of course, we haven't been living in normal times for the past three years-- but before the pandemic, before the cost of borrowing went to nearly zero, I would ask people what could undo the Canadian housing market, because there was definitely a period of strength. They'd always say, joblessness. If there's a big spike in the jobless rate, then that's going to hit the housing market.
Right now, despite all the attempts of central banks to try to cool the market and cool labor, labor's been pretty strong. And is that constructive going forward?
Rishi Sondhi: It is. I mean, well, it's constructive the near term for demand, for sure. A tight market will continue to generate wage growth and income growth and, of course, supports demand.
Now our forecast anticipates several quarters of sub-trend growth after this pop in the first quarter that we're seeing. So we do expect Canada's economy to slow as the impact of past interest rate hikes are more deeply felt in the economic system. So as growth slows, such a trend, that'll put some upward pressure on the unemployment rate and probably slow wage growth with a bit of a lag. So that'll turn from a highly supportive factor in the current environment to less of one moving forward, say in the second half of this year and into 2024.
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Would-Be Home Buyers Are Stepping Back In The Market, But Finding Limited Supplies