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TD Economics on the Canadian housing market HEADER
• Apr. 3, 2023

On Tuesday, TD Economics published its latest Provincial Housing Market Outlook, "Gauging the Time and Strength of Recovery." Click here to read that report.

For many Canadians, the housing market is a popular topic of conversation, akin to the weather or your local hockey team's chances of making the playoffs.

Along with gawking at listings of opulent mansions or checking online to see what the house down the street sold for, many of us like to speculate on the state of the market: is it rising or falling? Is it a buyer's or seller's market?

Or rather, when will I ever be able to purchase a home?

To help get a better sense of the state of Canada's housing market right now and what might happen over the next few months, TD Stories caught up with TD Economist Rishi Sondhi, who reflected on the state of the Canadian housing market right now, and what he is forecasting for the first half of 2023.

When will the market bottom?

According to Sondhi, across the country, home sales and price trends remain soft. Sales declined to begin the year, although increased 2.3% month-on-month (m/m) in February. However, even with this gain, sales remained at levels last consistently seen two decades ago in 2002.

New listings also plunged 8% (m/m) as sellers remained skittish. Since home prices have dipped, potential sellers might be nervous to put their homes up for sale, leading to fewer houses on the market. This lack of inventory was likely a factor pushing prices higher 1.7% (m/m), since buyers were competing for a smaller supply of homes.

On a three-month moving average basis, which helps illustrate near-term buying and selling trends, sales growth was flat in February. This is consistent with TD Economics' view that home sales have already "bottomed out" (i.e. hit their lowest point). That said, it will likely take another quarter for Canadian average home prices to hit their bottom, as conditions generally favour sellers in large provincial markets like B.C., Sondhi says.

In the second half of this year, sales and average home price growth should be stronger, Sondhi says. He explains that there are multiple factors contributing to this forecast. Recent financial market turmoil has pushed interest rates lower and they should decrease through the second half of the year and into 2024, he says.

"Our current forecast anticipates that the Bank of Canada is finished hiking [its overnight lending rate], although we acknowledge that there's perhaps more uncertainty on that given the recent bout of financial market volatility," he says.

"Other factors contributing to our view that prices will bottom in the first half of the year and improve in the second half include robust population growth and the notion that sales have fallen short of the levels we would typically see when scaled to other metrics, like income levels," Sondhi says.

A return to pre-pandemic prices?

With TD Economics forecasting the market to bottom in the near future, the next question is what a bottom might look like.

Home prices rose throughout the pandemic, peaking at a near 50% increase in 2022. But a lot has changed since then, Sondhi explains.

"Prices have fallen quite substantially from their peak over the course of 2022," says Sondhi. "When all is said and done, we think Canadian average home prices will have corrected by about 20% or so, give or take a few percentage points."

This means that while Sondhi expects home prices to decline, the average home price will still be higher than it was prior to the pandemic.

According to a January 2023 TD Economics report, even if sales have already bottomed, sales will likely remain depressed because prices and interest rates will still be relatively high, meaning homes may still be out of reach for many.

Sondhi said he expects this year to be the weakest sales year since 2002.

Where are there pockets of affordability across the country?

According to TD Economics' internal affordability metrics – which gauge annual mortgage payments as a share of disposable income in a given province – certain parts of Canada are more affordable than others.

"Markets across the Prairies and Atlantic Regions are probably the most affordable across Canada, particularly New Brunswick, Newfoundland and Labrador, Saskatchewan, and Alberta," says Sondhi.

Ontario and British Columbia are the two least affordable provinces. But other areas are becoming less affordable, too, he says.

"Nova Scotia has seen a pretty big decrease in affordability over the course of the pandemic and that might be a little bit surprising to some," he says.

"There's also been a pretty severe affordability deterioration in Quebec," says Sondhi.

"In Nova Scotia, home prices went up around 70% over the course of the pandemic, so they've had steeper home price appreciations than you've seen even in markets like Ontario and B.C."

The housing market in Nova Scotia is being supported by interprovincial migration, Sondhi says. Many people are moving from places like Ontario to Nova Scotia, where the absolute value of a home price is much lower. That has driven up home prices in the province.

However, Sondhi explains that this phenomenon of interprovincial migration has had some staying power as it has persisted through the fourth quarter of 2022. According to the latest available data, this phenomenon has yet to lose momentum, he says.

Is it a buyer's market or seller's market?

When it comes to the upcoming spring home-buying season, it might be a tale of two markets, notes Sondhi.

"Ontario and B.C. have markets where conditions are looser (i.e. houses are sitting for longer before changing hands) … which could keep downward pressure on prices in the near-term," he says.

Throughout the rest of Canada – especially in the Prairies, Quebec, and Atlantic Canada – markets remain tighter, explains Sondhi.

"Sellers in those provinces have a bit more power with respect to pricing just because sales levels, or actual selling activity, has held up better in those markets," he says.

"Demand is holding up better in those provinces so that means that buyers have to act a little bit quicker if they want to get a house."

The condo assignment market

As 2023 marches on, Sondhi says he will be keeping his eye on the "condo assignment market" – or the pre-construction condo market – to see whether it will impact the resale market.

Why is this market so interesting right now? When you purchase a pre-construction condo, you need proof that you'll qualify for a mortgage, but you don't receive your mortgage until you close. Many Canadians bought pre-construction condos pre-pandemic, in 2018 or 2019. Now, five or more years later, the appraised value of some units has decreased, and with a higher interest rate environment, some of those buyers no longer qualify for a mortgage.

That means, they are often forced sell their unit before the deal closes, so they put it on the condo assignment market, Sondhi says.

"We're watching to see if that manifests or begins to have an effect on other markets that we cover, for example resale markets," says Sondhi.

"In Toronto, condo prices, as measured by the MLS benchmark, are still falling, but the rate of decline has not worsened. As such, it's not clear the issues in the pre-construction market are spilling over into resale market in any meaningful way and making the trends worse."

Want to learn more about Economy?
TD Economics Explains: What is inflation?
When will interest rates go down in Canada?
Unpacking TD Economics' latest report, "Balancing pop in Canada's population"

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