Potential Canadian homebuyers stand pat, expecting prices to slide further

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Canadian home prices are heading into a steeper slide than previously expected, according to economists at Toronto-Dominion Bank.

TD economist Rishi Sondhi is now forecasting that the average national home price will drop 10 per cent through the early part of next year from the third quarter of 2023.

That marks a more severe fall than TD’s September forecast, when the bank was predicting prices would decline about 5 per cent over the same period.

Mr. Sondhi says the Bank of Canada has held its benchmark rate steady at 5 per cent for the past two policy-setting meetings, as TD expected.

The revision is mainly based on the fact that bond yields, which underpin mortgage rates, climbed in September and October.

Borrowers trying to qualify for a mortgage with a rate higher than 6 per cent needed to pass a “stress test” rate above 8 per cent.

Another culprit is the surge in new listings that flooded into the housing market in Ontario and British Columbia.

In Ontario, the sales-to-new-listings ratio plunged to 39 per cent in October from 63 per cent in May, Mr. Sondhi says.

“Conditions very much support buyers,” says the economist.

Mr. Sondhi says one reason for the unusually high level of new listings in Ontario appears to be that some condo investors in Toronto and Hamilton are exiting the market. The climb in condo units for sale in those and other cities suggests that over-leveraged investors are choosing not to hold on to their properties.

Potential buyers throughout the market, meanwhile, are holding off in case prices have farther to fall.

“Why would you buy now if you can wait and get a better price?” points out Mr. Sondhi.

Still, a 10-per-cent drop in national average prices would still leave them 15-per-cent higher than before the COVID-19 pandemic.

Mr. Sondhi cautions, however, that weaker economic growth or higher-than-expected interest rates could further worsen the forecast.

While unemployment has risen from record lows set last year, the jobs market continues to muddle along, he says, adding that consumers are more worried about the outlook.

“It’s certainly our view that consumer spending will slow,” he says.

On the upside, strong population growth should buoy housing demand, and fewer listings than TD is currently predicting may arrive on the market in the coming months, which in turn would lead to a slightly more shallow decline.

Mr. Sondhi is not looking for any dramatic shifts in the landscape as 2023 comes to an end.

“The headwinds facing the consumer and tailwinds supporting the consumer are probably going to continue to some degree in the near term,” he says.

Consumers appear to be running out of steam, according to the latest data from Statistics Canada. The pace of inflation fell to 3.1 per cent in October compared with a year earlier, which marks a slowdown from an annual growth rate of 3.8 per cent in September.

Royal Bank of Canada economist Claire Fan says signs that consumers are reining in their spending, along with a faltering labour market, suggest that inflation will continue to moderate in the months ahead.

She believes the Bank of Canada will not see the need to raise rates again but will cautiously pivot to cuts in the second half of 2024.

Daren King, economist at National Bank of Canada, is predicting that house prices will continue to slide as the market faces challenges in the form of the current relatively high level of interest rates and a less favourable economic backdrop.

Mr. King notes that the Teranet-National Bank Composite Index fell 0.4 per cent in October after rising for five months.

After seasonal adjustment, seven of the 11 metropolitan markets that make up the index were in positive territory. The biggest drop was seen in Toronto, which decreased 1.6 per cent. Edmonton, Vancouver and Ottawa-Gatineau also ended up in negative territory.

The Teranet-National Bank HPI tracks prices after they have been recorded at land registry offices, which means the numbers lag those of local real estate boards.

The downturn in prices came with a seasonally adjusted 5.6-per-cent drop in national sales in October from September.

The drop was the fourth monthly contraction in a row and the sharpest slowdown in sales since June, 2022, Mr. King points out.

Mr. King says Toronto is hardest-hit because the country’s largest city also has the richest prices.

“There’s definitely a problem with affordability in Toronto that we’re not seeing in Calgary or Montreal.”

The slowdown comes despite strong population growth, he adds.

“I don’t think it’s a demand problem – I think it’s the market conditions that are horrible.”

Move-up buyers, he notes, are discouraged because interest rates are so high.

National Bank is forecasting that the Bank of Canada will cut its key rate by 25 basis points in the second quarter of next year, with three additional cuts in 2024.

Across Canada, sellers began cancelling their listings in October, Mr. King adds, which in turn limited the increase in supply.

Still, months of inventory swelled to 4.1 in October from 3.7 in September and is now roughly back in line with its pre-pandemic level, he says.

“Months of inventory” describes the time it would take to sell all available listings at the current pace of sales.

Mr. King warns that one risk to the outlook that economists are watching closely is the health of the jobs market.

Homeowners will do everything they can to continue to keep their house, he says, but unemployment can make that impossible.

“If you lose your job, or see your hours cut, that’s another story,” he says. “You’re not able to pay your mortgage at all.”

Mr. King believes the first quarter of 2024 may be a good time for buyers in a solid financial position to buy before a potential rebound in prices later next year.

“If you need a house, it’s still a good time if you can afford it and you can qualify,” he says. “Just imagine all of the people who live with their parents and want to move out.”