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Couple standing in front of newly bought house.
• Jun. 19, 2023

Canada's housing market is once again a seller's market; at least, that's how TD Economist Rishi Sondhi would characterize the Canadian housing market right now.

Sondhi said the proof is in the TD Economics data research: in April, existing home sales increased to their highest level since June of last year. Prices crept up in April, rising 6% month-over-month, while the supply of homes for sale hasn't kept pace with demand, with the number of new listings remaining low.

That means competition for available homes for sale is up, prices are up, and the number of houses on the market remains well below historical norms. Combined, those factors add up to a market that favours sellers over buyers, Sondhi said.

"One would perhaps expect more of an increase in listings given that demand and prices are coming back so forcefully, but that's not what we're seeing right now," says Sondhi.

To help understand the factors contributing to this current seller's market, TD Stories went down the real estate rabbit hole with Sondhi, where he answered some of the most pressing housing-related questions, including:

What could be contributing to the low supply of homes for sale in the Canadian housing market?

First of all, notes Sondhi, there are some factors keeping homeowners from being forced to sell their homes, known as forced selling. These factors include a strong job market and the ability for some Canadians to lengthen their mortgage amortization in a high interest rate environment. Some individuals with variable rate mortgages who have seen their interest rates rise, for instance, might be able to extend the length of their mortgage so that they can continue to afford their regular payments.

Sondhi said investors with rental properties are also holding onto their properties and opting not to sell, as the rental market remains strong. At the same time, construction timelines are increasing for all types of units, so it's taking longer for new homes to hit the market, which is further slowing the availability of homes for sale.

Sondhi says there may also be a short-term psychological factor affecting supply as some homeowners keep their eyes on the market before deciding whether or not to sell. This could include prospective sellers who are hoping the market heats up before putting their houses up for sale.

"The market has been correcting for a long period of time," Sondhi says.

"Some potential sellers might need more time to see whether the market is rebounding before listing their homes. Sellers might also have seen what houses were selling for last year and might be waiting to see if house prices return to those levels before listing their homes.”

Another factor that could potentially be straining supply is that move-up buying has been hindered by a tough affordability backdrop. For example, those who want to move into bigger (and more expensive) homes may be waiting until it's more affordable to do so. This could mean that these would-be movers are staying in their homes longer.

The Bank of Canada interest rate has been rising. We're curious: how do mortgage rates influence housing prices?

Mortgage rates and housing prices are typically inversely related. Often, when mortgage rates increase, housing prices decrease.

However, Sondhi explains, it’s important to remember mortgage rates aren't the only factor that can impact housing prices. Others include the state of the job market, population growth and the housing supply.

In the first quarter of 2022, mortgage rates and housing prices rose simultaneously.

"If you think back to the beginning of the pandemic, there was the whole 'race for space' phenomenon," says Sondhi, explaining the trend that occurred when urban dwellers in many Canadian cities started searching for detached, single-family homes during the pandemic. This trend peaked early in 2022.

As an emergency measure, the Bank of Canada slashed interest rates, which caused mortgage rates to dip in 2020 and 2021 as a result. The federal government also implemented temporary measures to help Canadians financially stay afloat. Coupled with strong demand, these factors pushed housing prices up.

In response to inflationary pressures, the Bank of Canada began to increase interest rates in early 2022, which in turn led to an increase in mortgage rates, Sondhi says.

"Both housing prices and mortgages went up at the same time in the first quarter of last year, as the former was still being supported by robust levels of demand."

Was early 2022 the most unaffordable time in the history of the Canadian housing market?

According to Sondhi, no. In fact, it was the second most unaffordable time in the history of the Canadian housing market. The dubious honour of the least affordable time on record was when unaffordability reached its all-time peak in early 1989, just prior to the housing market crash.

With housing prices on the rise now, Sondhi says it looks likely that the second quarter of this year could surpass the pandemic housing peak in the first quarter of 2022 in terms of poor affordability.

What could help improve affordability in Canada?

"You can impact affordability through three channels: prices, interest rates and income," Sondhi says.

Canada looks like it may being going into a weak growth period over the next little while, so it might be difficult to improve household income growths over and above what has already occurred, Sondhi says.

"The answer," Sondhi says, "Short of really juicing income growth is to increase housing supply."

This is especially pertinent as immigration to Canada is expected to grow.

According to Sondhi, with an increase in supply, there could be less of an appreciation in prices, at least affording the opportunity for incomes to catch up.

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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