Are we really headed for a buyer’s housing market in Canada?

There are clear signs that Canada’s housing market is cooling. Brokers are seeing fewer bidding wars. The average sale price is dropping each month. And the same goes for the number of sales.

BMO’s chief economist Douglas Porter said last month that the GTA housing market, in particular, is “suddenly getting into buyer’s market terrain."

RBC also released a report last week that says all signs point to a fast rebalancing, with resales down and new listings up across the country, easing the supply-and-demand issue that has plagued the market for the last couple of years.

So, is Canada really headed for a buyer’s market? Or is it still too soon to tell?

What is the threshold for a buyer's market?

“Obviously, a seller's market is when you’ve got 30 people lined up to make bids. That's a no brainer,” says Porter. And that’s what we’ve seen throughout the country for much of the pandemic, with conditional offers basically non-existent and houses selling for hundreds of thousands of dollars over asking.

On the flip side, says Porter, “When a house sits for weeks and weeks, and months and months, that's when you've got more of a buyer's market.”

Another more granular indicator that’s used to determine a buyer’s versus seller’s market is something called the sales-to-new-listing ratio. It’s really as simple as it sounds: it’s the ratio of home sales to new listings. Porter says that a normal range is around 40% to 60%, although it tends to be toward the higher end of that range.

“If it gets down into the lower end of that range, or even below, it's seen as being a buyer's market,” he explains.

Home sales are slowing in Canada

Porter says there were periods when the market in some cities was “on fire,” with more sales than new listings in a given month, although that’s almost unheard of now.

“In the last month that we have full data for (April), of the 26 largest cities in the country, Toronto had the lowest sales-to-new-listings ratio of all 26 cities, which really surprised me,” he says.

He says that across the country, home sales are cooling in general, although there are still some outlier markets that are holding strong, such as Calgary. According to the latest data from the Canadian Real Estate Association, the number of sales recorded dropped by 12.6% from March to April.

Jason Mercer, chief market analyst at the Toronto Regional Real Estate Board (TRREB), notes that conditions were extremely tight within the city the first couple months of the year, sparking plenty of competition between buyers and exerting upward pressure on home prices.

“As we moved through March, April, and May, market conditions started to shift, largely on the back of interest rate hikes by the Bank of Canada.”

Rate hikes dull the homebuying frenzy of the last two years

Mercer says that the recent Bank of Canada rate hikes have had a quick impact on the number of sales. Buyers are reassessing their situations, including the type of house they’re looking to purchase, as well as location. He says it’s not necessarily that they’re going to hold off on buying a home entirely, but they’re no longer rushing to purchase.

“In some cases, households have to reassess based on how [the rate increase] is going to impact monthly payments. That does take some time to filter its way through the housing market,” he explains. That said, the Bank of Canada warned last week that homeowners could see a 30% increase in their monthly mortgage payments in five years.

While average selling prices have decreased over the last few months, Porter cautions that it’s important to keep things in perspective, saying that even with the big drop in April, it was still one of the strongest Aprils on record.

“We're cooling from incredibly hot levels of a year ago,” he says. “Even with fairly significant pullback in March and April sales, we're still well above their long-run average.”

Sellers reassess their expectations, while buyers bring back conditions

Porter says that it typically takes a while for prices to adjust when sales adjust, and that the country is currently in that transition period. He says potential sellers probably have a number in mind they’re holding out for, especially if they’ve seen their neighbour a block away sell for a certain price.

“When a market cools this quickly, there's usually a bit of a transition where sellers have to readjust their sights to some extent too,” he says. “Typically, prices follow sales with about a six-month delay, give or take. So, the process might take a few months yet, but certainly by all accounts it seems that at least in some areas, prices are starting to moderate, especially from their extreme levels.”

One major benefit for buyers Porter is starting to see is the ability to ask for conditions, such as a home inspection or financing. “Clearly there's less frenzy. Buyers can take their time a bit more. They don't have to dive into a bidding war with 30 others. The market feels a lot more calm now, a bit more rational. That's all good news.”

As for whether we can expect prices to stay lower, or whether they’ll increase again, Porter says he suspects that at some point prices will creep back up.

“I doubt we're going to go back to the kind of boom-boom days that we've seen in the last couple years,” he says. “The market overdid it in a number of cities, and there will be a correction in some cities.”

Affordability still a major driver of market trends

Porter notes that recent interest rate hikes may be at play when it comes to impacting overall affordability of home ownership, with affordability deteriorating since the start of the year as prices haven’t adjusted enough yet to offset increased borrowing costs.

“I suspect it's coming. I think in the months ahead, we are going to see some further softening in prices, which will at least compensate for the rise in interest rates, if not more.”

For Porter, the single most important driver for the housing market is mortgage interest rates, which will largely impact how much mortgage a person can afford.

“The rate increases are not going to stop until inflation breaks,” he says. “The Bank of Canada has a big job to do in terms of taming inflation. It's certainly not just a Canadian story. I think everyone's holding their breath to see whether inflation will back off anytime soon.”

Mercer notes that in previous economic cycles, when interest rates have increased, there’s also been higher unemployment, but recent data from Statistics Canada show that Canada’s unemployment rate continues to decline.

This, coupled with strong population growth based on immigration, will support the demand for housing, Mercer says.

Higher borrowing costs will likely prompt many to readjust their expectations of the housing market. “If you look at past rate tightening cycles, it can take a year to 18 months to sort itself out, as would-be home buyers came to terms with the change.”

Sellers may choose to stay put for now

Mercer says there may also be individuals listing their home right now, but if they don't get the price they're looking for, they may take their home off the market because they're not necessarily being forced to sell.

“We're not seeing a lot of households that are in economic stress and need to sell their home; quite the contrary. If you were thinking about moving up in the market and now interest rates are precluding that, or you're not realizing as much from your home sale as you thought you would, you may see individuals just taking their home off the market and putting that decision on hold.”

Mercer says if that’s the case, it’s unlikely we’ll see the divergence between sales and listings that indicates a traditional buyer’s market. They may end up moving in lockstep, unlike past market corrections.

“While the trend may suggest we could be moving toward a buyer's market, I think we need to move through the summer, and get a better sense of what the Bank of Canada is going to do,” says Mercer.

“And it's really important to be paying attention to what existing homeowners do. Do they continue to list their home for sale, or do they also pause to see how markets and interest rates shake out? That'll dictate where we go in terms of market conditions over the coming months.”