BMO: Demand-side pressures largely responsible for housing market's problems

Latest Canadian housing activity numbers show that much of the sector’s current problems stem from the demand side of the equation, according to BMO Economics.

Robert Kavcic, senior economist and director of economics at BMO, said that the 12.6% seasonally-adjusted decline in home sales last month indicated a much-welcome break in Canada’s housing fever.

“Just to reinforce again how heated the demand side was: Despite one of the largest two-month declines in sales that we’ve seen historically, activity is still almost 10% above pre-COVID norms, while the raw April sales tally was one of the highest on record,” Kavcic explained. “But it’s clear that market conditions are changing quickly.”

This shifts included a 2.2% decline in new listings, which contributed to the sales-to-new listings ratio dropping to 66.5% in April. Kavcic cited this as a crucial factor in softening market balance amid the sales decline.

Read more: National home sales, prices fall in April

The weakening was particularly evident in the largest markets – the areas that have the greatest influence on national housing sector dynamics.

“Regionally, Ontario markets are weakening most and fastest, especially further outside the core of Toronto (these were also the hottest markets in the country during the pandemic). Sales in the province slid 21% in April, and are now back in-line with pre-pandemic activity levels,” Kavcic said. “The market balance has gone from drum tight with ‘not enough supply,’ to one that resembles the 2017-19 correction period.”

Another factor that tempered housing activity was the impact of the Bank of Canada’s large interest rate hikes. Kavcic predicted that on top of the current levels, the central bank is likely to add another 100 basis points through multiple hikes up to at least July, and 125bps by the end of 2022.

“That effectively means that the market will go from being priced at mortgage rates of roughly 1.5%, to somewhere in the 3.75%-4.5% range, depending how bond yields evolve (five-year fixed rates are already widely above 4%),” Kavcic said. “So, when we speak of housing correction it’s not a question of ‘if,’ but ‘where, how much, and for how long?’”