Canadian real estate sales are expected to remain weak until prices fall further. That was the take from BMO Capital Markets, whose latest report cites the gap between buyer and seller expectations holding sales back. Until that gap is closed, either by force or voluntarily, sales will remain weak relative to historical levels. The bank sees the latter to be the most realistic option.
Canadian Real Estate Sales Improved, But Remain Historically Weak
The bank focused on Canada’s largest real estate market and its recent surge in sales. Toronto home sales in July were up 10.9% compared to last year, marking a fourth consecutive month of seasonally adjusted growth. Any improvement is better than none, but there’s a mighty big asterisk on that growth.
“Of course, the starting point here was extremely low for Toronto, and sales remain well below the past-decade average,” explains Robert Kavcic, senior economist at BMO.
He touches on a point that was largely glossed over—home sales were unusually weak. For context, the volume of sales was just slightly better than July 2017, when a mini-crash occurred with the rollout of non-resident home buying taxes.
If that wasn’t a recovery, what would it take for home sales to recover? The sharp decline in prices also observed last month is a hint.
Canadian Real Estate Sales Held Back By Gap Between Buyer and Seller Expectations On Price
Source: BMO Capital Markets.
The gap between seller and buyer expectations is too wide for a deal to be made. Falling prices and higher sales last month served as strong proof, but sales remained tepid, implying there needs to be more give to restore market health.
“A wide bid-ask spread, so to speak, has kept the market from clearing and has left listings to go stale,” explains Kavcic. He sees only three realistic possibilities to resolve this—forced selling, lower mortgage rates, or price cuts.
Forced selling would require a serious recession, job loss, and surging delinquencies. This would force sellers to seek lower prices, trying to avoid default. This is the least realistic of options, according to the bank. “We’re not seeing that, and we don’t want to,” he notes.
Lower mortgage rates are more realistic—though more realistic isn’t necessarily realistic. The bank’s math suggests rates in the low 3% range would provide enough stimulus to pick up home sales, requiring rates to fall about 100 basis points (bps). They see another 50 bps of cuts from the Bank of Canada to be difficult, and that only gets the market halfway there.
Price cuts are the last option, and the one that’s “going to clear the market,” says Kavcic. He notes that progress has been slow, but prices are starting to come down and that’s helping the market. Further reductions would help get more deals done.
While the bank presented three options, two aren’t realistic expectations. Canada’s economy is slowing, but it’s far from seeing forced selling and a deep recession materializing near-term. Falling mortgage rates may seem simple, but that would also require a serious erosion in demand to weaken inflation. That would also mean households are weak, making any boost in purchasing activity also difficult to see. Price cuts after one of the biggest surges in prices is the most realistic, but let’s be honest—human nature is rarely this rational.