TD Economics Anticipates a Larger and Prolonged Downturn in Housing Sales and Prices

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The Canadian housing market is experiencing unexpected challenges, as TD Economics reports a more substantial and extended downturn in home sales and average prices than previously projected. The key factor behind this unsettling trend is a significant population shift and a lag in the supply of housing to meet the demand.

Downturn in Home Prices and Sales

TD Economics predicts that home prices and sales will see a decline in the last quarter of this year (Q4) and the early part of next year. It’s expected that home prices will drop by 6%, while sales are projected to decrease by 8% compared to Q2 levels. This decline is primarily attributed to the ongoing shift in the population and the slow increase in the housing supply.

This decline, however, is less severe than the sharp drops of 20% in prices and 40% in sales that occurred due to Bank of Canada rate hikes between Q1 of 2022 and the same period this year. TD Economics believes that the Bank of Canada will halt rate increases and lower the policy rate by Q2 of the next year, potentially stabilizing the market.

Factors for Recovery in 2024

Looking ahead, TD Economics anticipates that Canadian bond yields will decrease from their current multi-year peak by the end of this year. This, combined with a growing population and a tight job market, is expected to help boost home prices and sales by the second quarter of the next year. However, the recovery is expected to be gradual in most markets due to affordability challenges. It may not be until 2025 that national home sales return to pre-pandemic levels.

Regional Variances

The impact of these trends is not uniform across all provinces. Ontario and British Columbia are expected to experience the most significant price drops and sales reductions in the near term. This aligns with the aftermath of the Bank of Canada’s rate hikes in June. Smaller decreases are anticipated in Quebec, Nova Scotia, New Brunswick, and Prince Edward Island. TD Economics believes that each of these provinces will witness a modest increase in prices and sales by mid-2024. However, affordability in these markets, except for New Brunswick, is likely to remain near record lows.

On the other hand, Newfoundland and Labrador and the prairie provinces may see prices and sales rise during the same period due to better relative affordability. The prairies have experienced an increase in sales-to-listings ratios in favor of sellers since early 2023. Notably, Newfoundland and Labrador’s ratio was 30% higher than its long-term average as of August, and Alberta has seen a significant influx of migrants from other provinces, contributing to increased activity.

Bleak Housing Outlook

The Canadian economy’s weaker-than-expected performance is expected to have a detrimental effect on housing demand, potentially leading to forced selling and an overall negative housing outlook. If inflation remains at higher-than-expected levels, interest rates may stay higher than initially forecasted. At the same time, as the country’s population continues to grow, housing shortages are likely to persist, potentially driving prices higher than anticipated.

The Canadian housing market is facing a more extensive and prolonged downturn than previously projected, with various factors at play across different regions. While there is hope for recovery in 2024, the housing outlook remains uncertain, driven by economic conditions and shifting demographics.

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