I told you that higher interest rates would lead to more Canadian housing inventory. Canadian Real Estate Association (CREA) show that sales of existing homes fell sharply in May. At the same time, stocks have soared as more owners cash in on some of those record gains. Falling sales and rising inventories have already brought the market back into balanced territory. However, with further rate hikes in the offing, demand could decline further.
Canadian real estate sales fell 8.6%, back to pre-pandemic levels
Canadian real estate sales have fallen sharply in recent months. Seasonally adjusted sales fell to 42,649 units in May, down 8.6% from the previous month. Unadjusted sales fell 21.7% from the same month last year. Home sales in Canada are now at pre-pandemic levels and just above the 10-year average.
Canadian real estate sees fewer sales, but much more inventory
New Canadian home listings are coming onto the market at a much faster rate as more people cash in on some gains. Seasonally adjusted new listings reached 74,145 in May, up 4.5% from the previous month. Unadjusted units rose 6.3%, a substantial rise as demand (at these prices) plummets. You know how people don’t sell their house when it’s going up $50,000 a month? The opposite trend is starting to take shape.
The Canadian real estate market is now balanced and could ease further
The drop in sales and the increase in inventories helped restore market balance. The seasonally adjusted sales-to-new listings ratio fell to 57.5% in May, down 8.2 points from the previous month. The unadjusted SNLR fell 2.1 points from the same period last year, so conditions are easing by all accounts. A ratio at this level implies that Canada is now a balanced market, believe it or not. It was quick.
What does it mean? The SNLR is used by the real estate industry to measure the relative demand for inventory. When the ratio is between 40% and 60%, real estate markets are balanced. Above 60%, the market is a seller’s market: low stocks and higher prices appear. Below 40% there is a buyer’s market where prices fall and inventory becomes plentiful.
At the national level, the market is now balanced, but the trend is for a slowdown in sales. Toronto and Vancouver tend to dominate the market, and they have already started to see the ratio drop even lower. Most of the drop in demand is likely due to investors, who saw their share of the market increase as rates fell. As rates rise, they lose their exuberance, which helps restore balance.