How Far Will Canadian Real Estate Prices Drop?

Here is Canadian real estate market update to focus on Vancouver value.

  • National home sales were down 3.9% on a month-over-month basis in September.
  • Actual (not seasonally adjusted) monthly activity came in 32.2% below September 2021.
  • The number of newly listed properties edged down 0.8% month-over-month.
  • The MLS® Home Price Index (HPI) declined by 1.4% month-over-month but was still up 3.3% year-over-year.
  • The actual (not seasonally adjusted) national average sale price posted a 6.6% year-over-year decline in September.
Home sales recorded over Canadian MLS® Systems fell by 3.9% between August and September 2022. From May through August, month-over-month declines have been progressively smaller. The September result marked a slight increase in the current sales slowdown that began with the Bank of Canada’s first rate hike back in March.

While about 60% of all local markets saw sales fall from August to September, the national number was pulled lower by the fact markets with declines included Greater Vancouver, Calgary, the Greater Toronto Area (GTA) and Montreal.

The actual (not seasonally adjusted) number of transactions in September 2022 came in 32.2% below that same month last year and stood about 12% below the pre-pandemic 10-year average for that month.

The number of newly listed homes edged back a further 0.8% on a month-over-month basis in September. This built on the 6.1% and 4.9% declines recorded in July and August, respectively, as some sellers appear content to stay on the sidelines until more buyers are ready to get back into the market. It was an even split between markets where new supply was down in September and those where it increased, with the biggest declines in the GTA offsetting the largest gains in British Columbia’s Lower Mainland.

With sales down and new listings seeing minor change in September, the sales-to-new listings ratio eased to 52% compared to 53.6% in August. The September 2022 reading for the national sales-to-new listings ratio was back on par with those in June and July, and only a little below its long-term average of 55.1%.

There were 3.7 months of inventory on a national basis at the end of September 2022, up slightly from 3.5 months at the end of August. While the number of months of inventory still well below the long-term average of about five months, it’s also up quite a bit from the all-time low of 1.7 months set at the beginning of 2022.

The Aggregate Composite MLS® HPI edged down 1.4% on a month-over-month basis in September 2022, not a small decline historically, but smaller than in June, July and August.

Breaking it down regionally, most of the recent monthly declines had been in markets across Ontario and, to a lesser extent, in B.C. The standout trend in August and September was that quite a few of those Ontario markets saw monthly price declines get stopped in their tracks, mainly in the Greater Golden Horseshoe. In a few markets prices even popped up a bit between August and September.

The non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 3.3% on a year-over-year basis in September, a far cry from the near-30% record year-over-year gains logged in early 2022.


Highlighting the September figures so for the sixth consecutive month housing sales on a seasonally adjusted basis declining. The September sales figure is the worst in three years again this is on a seasonally adjusted basis so the housing figures as we know continue to be really really weak. You know greater Toronto the largest housing market as we talked about before that's 20-year lows for the month of September greater Vancouver you know the third lowest august in 20 years outside of 2008 and 2012 obviously we know those were incredibly weak years from an economic perspective and so if you look at it we now have national house prices continuing to roll over. So the home price index which again is a seasonally adjusted is a hedonically adjusted benchmark it tends to lag which is important when you're understanding looking all these data figures. When you're reading the media headlines you know a lot of them will be talking about average house prices and those can be extremely volatile and then some of them will look at home price indexes. So it's important to understand what metric these media sources are referencing and I think that the home price index tends to lag but at least it gives us a smoother data point to look at so a 1.7% month-over-month decline is actually a very large move for an index like this. And so peak to trough we're now down 12% from the highs this year as people say well, you know 12% but 12% on the national level is actually very large it's very significant especially in this short amount of time. That we've had and so, if you actually look at this from a historical context this is the single largest decline in the home price index since the index was created in 2005 so again if you look at the chart you'll see that in 2008, 2009 during the global financial crisis Canadian house prices nationally declined by nine percent. So we're now at 12% and I think everyone can agree there's more downside to come in the very near term. So this is a historic correction that most canadians have actually not yet lived through and so just to give you some context you know a lot of people say okay well you know national house prices they need to go back to at least pre-pandemic levels to get to pre-pandemic levels. From my initial calculations here, you'd have to have the national house price index fall 38% from its you know from its highs and so just to give you some more context in the global financial crisis in the United States. The case-shiller index which is the equivalent in the u.s fell by 32 percent peaked trough and it went from basically peaked in I believe in 2006 and slid all the way before bottoming sometime in 2011, 2012. So it's hard to say how it's all going to play out but I think when we're looking at it and saying well if the US was 32% we have to be there. You have to keep in mind that this was a global financial crisis this was a systemic issue basically blew up the entire banking system across the world was almost the end of the existing monetary system as it was and in fact, it took us 10 years of zero negative interest rates and 10 plus years of quantitative easing aka central bank money printing and involvement in the bond market to basically keep the life on keep the monetary system on life preservation so to suggest that we're going to get there in Canada. I’m extremely skeptical unless you're predicting basically another doomsday event where the banking system essentially blows up again could happen certainly not my base case but I think more downside to come clearly as we still have what the markets are pricing another 50 basis points of rate hikes from the bank of Canada but even if the rate hikes stop and pause I think these rates are still too high with Canadians at these levels of house prices and levels of debt five percent mortgage rates are simply too high for the economy to stomach. So again keep in mind that moving forward that these home price corrections and how much prices need to fall just because they might not get to say 32 percent or 38% on a national basis doesn't mean you're not going to see that in certain pockets. And of course we're all aware that in certain suburban markets that had extreme amounts of froth you know the work from home movement pushing prices up we're already seeing 15% to 20% corrections in some of these very frothy suburban house markets so could those get to 30%, 35%, 40% corrections absolutely I think that's a reasonable probability. So we'll have to wait and see how that sort of shapes up so there's going to be certain pockets that are going to see steeper corrections more so than others but on a national basis you know we're already through the steepest correction. I think there's more to come but to say that you know we're going to have 30 plus percent corrections on a national basis remains to be seen as I think what's important to contextualize here is when we're looking at this by city. So if you look at it we have various price corrections across the frothiest markets and so you say well where's the highest house prices where's the most debt and most leverage that's clearly in the GTA (Greater Toronto Area)) which means the home price index peak to trough is now down 15% greater Vancouver obviously another area with I would say very excessive valuations down seven percent Ottawa down, eleven percent Montreal down, six percent and then you look at some of these pros these cities that have been flat for really several decades calorie now down two percent peak to trough so I don't think there's excessive valuations in some of these markets but another is they're obviously more ripe and more vulnerable to these steeper corrections so you know and again just to kind of quickly touch on Calgary someone said they're next they're going to blow up but it's like everywhere is going to blow up and I go well I mean that market is actually up 30% since 2007. So, you know over 15-year period that's 2% annualized growth which is actually below the rate of inflation below the rate below the rate of wage inflation. So to suggest that there's like you know bubbles in say Calgary for example I don't see that argument to say that there's over valuations and bubbles in the gta and parts of the greater Vancouver market fair assessment but that's kind of how I’m looking at now so you can see as rates are going up we are now seeing obviously the ramifications of that the bank of Canada is getting exactly what they want which is a household balance sheet recession. In fact, Canadian households in the third quarter lost nearly a trillion dollars of household wealth again you know wealth is somewhat fictitious because that's tied to their largest assets which is real estate but there was about a trillion dollars of wealth that was evaporated off of household balance sheets. It was the steepest drawdown for any quarter going back to the data series going back to I believe it was the 1980s so the household balance sheet recession is officially here and so when you obviously feel less wealthy you have less ability to tap into home equity to then use that to sort of pay off say other debts to go out and buy new cars new boats et cetera. So the wealth effect is real something the bank of it's something central banks talk about actively and so one way to reduce inflation is to hit households where it matters most which is their their net worth and so the bank's ultimate goal here to bring inflation down is to make everyone poor everyone a little bit less wealthy so you spend less into the economy. And that will obviously help to fix inflation over time and so that's kind of what we're looking at but there are ramifications of that again this is not tied to just the housing market as we can look and see the Canadian labor market. For example it just shed another 40,000 jobs last month they've now we've now seen three consecutive monthly declines in the labor market and interestingly enough a lot of this is actually hitting the construction market the construction industry shed 38,000 jobs last month it was the single largest one month decline since 2005. So we're starting to see the knock-on effects now slowly starting to filter through a lot of this data and keep in looking so I think the data is going to continue to deteriorate moving forward and so ultimately the question is how high do rates continue to go as we can clearly see there's this impasse now in these housing markets and people are asking what I do what's next how does this sort of shape up. Well I certainly don't have a crystal ball all we have to do is look at the housing affordability index and clearly see that houses have become extremely unaffordable yes we've seen price declines yes this is the largest national house price decline on record but rates are still so high that housing actually hasn't got any more affordable and so how does this resolve itself either it's going to resolve itself through lower prices or it's going to low resolve itself through a lowering of rates maybe mortgage rates go from five down to four and a half down to 4.2 as you get this economic recession and the bond market reprices economic growth. However that if probably is going to take some time don't have rates falling in the next one to two months so it's me and it could be a combination of both maybe prices drop a bit and interest rates fall with it to hopefully relieve some of that affordability index but the end of the day you are at this impasse and this is what the data is showing us that there is this this problem and so what we're seeing you know feet on the ground is yeah sales are incredibly weak. Buyers are wanting to wait but at the end of the day inventory is still pretty low because the inventory levels were picked dry over the last couple years so you're building you had a record low inventory base coming into this year it's going to take some time to build that inventory up. However we're seeing in parts of these markets in the gta and in greater Vancouver we had 20-year lows 20-year lows and new listings the sellers are kind of holding off. So you have a lot of people that bought you know 10, 15, 20 years ago that have tons and tons of equity, they don't like the prices today and they're opting just to hold still and sit pat and so there's kind of a bit of a tug of war and so the people that are looking for deals today there's really not a whole lot of inventory and so you're seeing actually a lot of the inventory that's on the market today is you still have sellers pricing things at February, March, April pricing and they'renot actually that realistic about selling. So they'll sit there on the market for two or three months with noprice reduction and very little negotiation room on the pricing you only have a small cohort of the market that's actually willing to trade at what the offers are coming in at so we have a very liquid market and we're actually seeing this very we're seeing very large discrepancies in pricing which means that okay you can see the odd house is maybe even getting more than one offer I think there's a cohort of buyers that I think are actually overpaying for some houses and you go wow that house traded it's too high price like don't these buyers know what the market conditions are and then you see other ones who go oh man that seller like he dropped his price three times in a month and took a low ball offer and basically reset that neighborhood so you're because when you have 20 plus year lows in housing sales in parts of these markets price discovery becomes extremely challenging and so this is kind of the environment that buyers and sellers are operating in and it's almost makes it difficult on a realtor an agent's business to try to price things. Because ultimately you have to sort of price it at a certain level where you think it should be give yourself that bit of room for negotiating and see how the market digests it again if you've got no offers you know five weeks on the market chances are you're too high and you got to cut your price and so but there's again there's only a certain cohort of sellers that are also open to engaging in that and there's a lot of unrealistic people. I think we'll probably start to see they'll reduce pricing over time but it might take them three, four, five months to actually reduce their price and then they're one step behind the market yeah they reduce their price but they reduce it by a couple percent but in during that time that they've reduced the market has continued to fall lower. So, keep in mind we're in this very liquid market, the housing market the data I think is continuing to deteriorate I think that inflation again my opinion is going to come down lower. I feel just to get on to this last little bit, this is the 1980s interest rates are going to continue to skyrocket you know remember when inflation was this high we had rates at 10, 15 plus percent. I just need to preface everything again you guys can go and do your own research but we have to remember that the 1980s government debt government debt to GDP was at 50 percent give or take was up to 50 of GDP today it's about 110 of GDP. So you've got the government balance sheets the sovereign balance sheets which are not the same shape as they were in the 1980s. You can't compare those the second more important one is corporate balance sheets in particular you can go household balance sheets household debt to GDP in the 80s was around 60 percent of GDP. Today it's at about 110 percent of GDP. So, you've basically got a doubling of household debt to GDP so this is not the 1980s this is not your granddaddy's inflation of the 80s these are much different environments. And so I would argue that the rate movements that we've seen which is a doubling in six months is actually are it's today's equivalent of what you know your granddaddy might have gone through in the 1980s. I would say that is our equivalent based simply on debt to GDP levels again. We've talked about it on the show but house global debt to GDP is at 365%. Okay so it's we've seen more than doubling of debt levels and you can use the same simple analysis right you go back to the 1980s and say okay well yeah mortgage rates got up to you know 15, 18% but you know house prices were a couple hundred thousand dollars that same house today is 1.8 million dollars and so when the rate moves from two to five. It makes a real difference and we've talked about it already on the show. If you have a million dollar mortgage today on a variable rate product you've seen your monthly payments increase year to day your monthly in payments have increased by a minimum of fifteen hundred dollars per month. So that is a material difference on household balance sheets and that's why we're seeing the reduction in wealth what one trillion dollars wiped off that's why we're seeing the job layoffs because that's going to trickle through into consumer spending all you have to do guys go on google go google fedex. Fedex news go look at the latest report from fedex huge miss on earnings stock price down 15% on the day basically talking about a global recession that their shipping volume is down tremendously because the global economy the consumer is incredibly weak and fedex serves some of the largest businesses. And so when their shipping volumes drop it really shows you I think real-time data not the lagging data that the government puts out but real-time data is the consumer is in a much worse position. And I think the data is showing but that will slowly filter through over the coming months so that's my thoughts could be wrong could be right.

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