Canadian real estate markets are softening as higher rates begin to weigh on virtually all markets. RBC warns October data reveals falling existing home sales and rising inventory. The combination has resulted in the price decline for a typical home doubling pace last month. Despite some mortgage rate relief appearing, the bank expects the market weakness to spread further in the near term.
Canadian Real Estate Markets Are Slowing, Rate of Price Declines Double
Canadian real estate markets are showing weakness across the country. Existing home sales fell 5% in October, falling 12% over the previous four months. At the same time, inventory is beginning to rise, helping push home prices lower.
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The price of a typical home has reversed the gains made over the past few months. Home prices fell 0.8% in October, doubling the rate of decline a month before. Another month like this could dip unadjusted annual growth into negative territory.
“We expect this downtrend to continue in the coming months,” explains Robert Hogue, assistant chief economist at RBC.
He attributes the broad decline to higher interest rates and a lack of affordability. The trend stands out in provinces like BC and Ontario, where prices are the highest.
Ontario Leads The Market Lower With Crisis-Level Sales
Ontario real estate led the country’s exuberant markets higher, and now it’s doing the opposite. Rising interest rates helped provide significant leverage to boost prices. Predictably, rising rates are reversing that activity, especially in pricey Ontario, where leverage is essential to supporting rapid price gains.
“Home resales in the province fell for the fifth straight month in October, reaching the lowest levels since the Great Financial Crisis (excluding the pandemic shutdown period),” says Hogue.
He notes that Ontario’s exuberant market isn’t the only one weakening. Regions that managed to buck the national slowdown are finally starting to show signs, like Alberta. The province saw existing home sales fall 8.3% in October.
For now, holdover provinces have seen annual price growth remain positive. However, that’s expected to change soon.
Canadian Real Estate Markets Expected To Continue Softening
Canadian real estate prices launched higher at signs of falling rates earlier this year. Many expected that to repeat after softening inflation data, but Canada’s largest bank doesn’t see it. The macro-environment today is very different from the one a few months ago.
“High interest rates, major affordability challenges, and mounting economic uncertainty have kept homebuyer demand muted, especially in high-priced markets in Ontario and BC,” Hogue explains.
Adding, “We see this trend continuing into next year. With higher interest costs bringing more sellers to market, buyers could gain even more pricing power in the months ahead. This would set the stage for further price erosion in Ontario and BC.”
The bank warns this weakness may potentially spread to other regions. A turnaround isn’t expected until interest rates pull back, and they don’t see the first Bank of Canada policy cut happening until mid-2024. This expectation appears consistent with market expectations that the policy rate remains sticky despite falling bond yields.