Housing markets in Canada are in full-blown cooling mode, says Robert Hogue, a member of the Macroeconomic and Regional Analysis Group, with RBC Economics..“Rapidly rising interest rates are having a definite chilling effect on housing market activity across Canada,” says Hogue. “Home resales fell for a third-straight month in May with nearly all local areas seeing some moderation.”.Some markets are cooler than others, says Hogue..“The situation varies vastly across the country,” he says. “Despite declining in May, and in several cases, April, activity remains strong and well above pre-pandemic levels in the Prairie and Atlantic provinces. The Canada-wide softening entirely reflects trends in British Columbia, Ontario and Quebec where buyers are now clearly on the defensive.”.Home resales dropped to 512,000 units (annualized) in May, the first time activity slipped below the 525,000 units recorded in February 2020 since the pandemic-era rally began in the summer of 2020..A slowdown will see markets that once heavily favoured sellers move into balanced territory and eventually favouring buyers as more homes come on the market.."New listings rose 4.5% month-over-month in Canada in May, accelerating the rebalancing process that began in March,” says Hogue. “The starkest developments are taking place in Ontario and British Columbia where sellers are rapidly losing their previously strong grip on the market, although demand-supply conditions aren’t putting buyers in the driver’s seat quite yet. .“Sellers however still hold firm positions in other regions of the country. Atlantic Canada markets, in particular, continue to be exceptionally tight.”.With the Bank of Canada having declared war on inflation with a series of hikes of its prime overnight lending rate and more hikes promised, the temperature in housing markets will get cooler.."We expect bearish sentiment to build and spread further as the Bank of Canada forges ahead with a forceful monetary policy normalization,” says Hogue. “We think this will set the stage for broad-based property depreciation in the period ahead.”.Here are Hogue’s observations of different regions of the country..Home prices coming down in Ontario and British Columbia.The MLS Home Price Index declined for the second-straight time in May, falling .8% month-over-month Canada-wide. Ontario and British Columbia accounted for most of the softening. Cambridge (-4.6%), North Bay (-4.0%), Woodstock-Ingersoll (-3.9%), Huron-Perth (-3.6%), London-St. Thomas (-3.5%) and Chilliwack (-3.0%) recorded the more notable drops from April. The MLS HPI fell modestly in the Greater Toronto Area (-1.1%) but was largely flat in the Greater Vancouver Area (up .1%). We expect downward price pressure to build further in Ontario and British Columbia as these markets are more sensitive to interest rate increases..Property values peaking in Alberta?.There were signs that prices may be peaking in Alberta. The MLS HPI fell slightly month-over-month in May in Calgary (-.1%) and Edmonton (-.4%). In the case of Edmonton, this took place amid demand-supply conditions swinging sharply out of seller’s market territory in the past two months. We think recent developments point toward more stable price trends, and not necessarily a material correction. We believe the relative affordability of Alberta markets will keep demand solid in the near term..For the period from June 1-20, the Calgary Real Estate Board (the only board in the country that provides a daily statistical update) shows overall sales are down 2.7% from the same period last year. Two categories are responsible for the decline: single-family homes (down 18.56%) and semi-detached (down 16.77%). The other two categories are showing an increase in sales: Townhomes up 31.34% and apartments up 37.54%. Median prices in all categories are up, year-over-year..Prices keep escalating in Atlantic Canada.While the pace generally slowed, MLS HPIs continued to appreciate last month. Moncton (up 2.5% month-over-month), Saint John (up 2.2%) and PEI (up 1.4%) led the way with the bigger monthly gains. With demand-supply conditions still very tight across the Atlantic region, favourable affordability relative to other parts of Canada, we expect prices to face milder headwinds in the period ahead..“The highly atypical synchronization of local market cycles since the start of the pandemic is gradually coming apart,” says Hogue. “Rapidly rising interest rates, and we expect the Bank of Canada to hike its policy rate by another 125 basis points by the fall, apply uneven pressure on home buyers across Canada with those in the most expensive markets facing the bigger challenges.” .“We believe the cooling trends that have emerged in the last three months will intensify in the coming months, leading to widespread price corrections, especially in Ontario and British Columbia.” .“Peak-to-trough, we think benchmark prices could decline around 10% nationwide and closer to 13% in Ontario and British Columbia. Corrections in other provincial markets are likely to be more modest.”.Hang on tight, this is turning into a roller coaster ride.
