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  • Writer's pictureMedvisory Team

Canadian Housing Market Outlook (Summer 2023)

Here, we summarize key takeaway's from TD Economics' June 2023 Report:

Canadian Housing Market Outlook (Summer 2023)
A decline in Canadian home sales in the second half of this year is expected, reversing some of the recent strength.

• The updated forecast has been influenced by significant positive surprises in Canadian home sales and average home prices during the second quarter, compared to projections in March. TD had initially indicated that sales had fallen short of levels aligned with fundamental factors like income and population growth. However, the recent surge in sales has effectively closed this gap. Additionally, the rapid price increase has negatively impacted affordability more than TD had anticipated, which is also a concern for future market activity.

• In response to resilient housing and consumer spending data, the Bank of Canada raised its policy rate in June following a four-month pause. By the end of July, policymakers will have implemented an additional 50 basis points of tightening compared to our earlier expectations. Beyond the direct affordability impact of a higher policy rate, a more hawkish central bank is likely to temper the enthusiasm of buyers who were previously rushing into the market when the Bank had paused earlier in the year. It appears that Bank of Canada signals are playing a significant role in shaping housing market dynamics. TD's bond yield forecast has also been substantially revised upwards.

• TD anticipates a decline in Canadian home sales in the second half of this year, reversing some of the recent strength. Furthermore, TD expect that purchases will grow at a slower pace in 2024 compared to previous projections. Despite limited supply and tight markets, average prices should continue to grow positively in the third quarter, but TD foresees a slight drop in prices in the fourth quarter. Similar to sales, TD has adjusted our quarterly growth expectations for next year compared to their March forecast.

• Given the challenges outlined above, one might question why TD is still forecasting growth in sales and prices for next year. TD expects the Bank of Canada to commence rate cuts in the second quarter of 2024, and bond yields are anticipated to trend lower. Meanwhile, robust population growth will persist, and job markets are expected to yield positive income gains, even with a slight increase in the unemployment rate.

• The resale market continues to experience low supply, with new listings approximately 16% below the post-GFC (Global Financial Crisis) average in May. Several factors contribute to this restrained supply situation. Strong job markets and extended amortization periods have prevented forced sales. Another factor possibly limiting listing growth is the potential disincentive of poor affordability for move-up buyers. While we may observe a short-term increase in listings as homeowners respond to this spring's firmer price conditions, TD anticipates a more sustained rise in resale supply next year. This is even as continued job market resilience reduces the risk of a flood of forced sales.

• In terms of annual average growth, TD anticipates that sales will outperform in Ontario and British Columbia in 2023 and 2024. However, this largely reflects a return to more "normal" sales levels after a steep decline last year. On a quarter-on-quarter basis, TD expects relatively cooler price growth in Ontario and B.C. for the remainder of this year and next, primarily due to heightened sensitivity to higher interest rates. This is despite compositional factors, such as stronger growth in more expensive detached prices, offering some short-term upside to average prices.

• In contrast, TD projects that quarterly price growth will surpass expectations in the Prairies going forward, marking a turnaround from earlier-year underperformance. This is supported by reasonably favorable affordability conditions and relatively stable economic growth. Sales growth in Alberta may lag somewhat due to its relatively high starting point. In the Atlantic region, robust population growth combined with tight markets should maintain elevated prices through the latter half of this year and drive increases in 2024, although severe affordability challenges may restrain the pace of growth. In Quebec, slower population expansion will have a more significant impact on demand compared to other regions. Furthermore, markets in Quebec that are less constrained than the rest of Canada (though still tighter by historical Quebec standards) are likely to experience relatively slower price growth going forward.

• The potential for stricter mortgage lending regulations has been raised by regulators and poses a significant downside risk to the outlook. However, TD does not have a clear enough view to incorporate this into our forecast. Additionally, if the central bank's hawkish signaling significantly disrupts buyer sentiment, sales could be weaker than anticipated in the short term. Weaker-than-expected economic growth could also exert downward pressure on prices, both through softer demand and a potential increase in forced selling by financially stressed homeowners.

• On the flip side, compositional factors that drive average prices higher in Ontario and B.C. may persist longer than expected. Housing shortages arising from robust population growth could also push prices higher than TD's current projections.

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