Canadian real estate markets aren’t a buying opportunity—yet, according to BMO. In a research note to investors, the bank warned major cities are reporting home sales cooled further in May. These markets are also seeing inventory accumulate, leading to a demand balance that typically sees prices fall. Sellers resisting price cuts in hopes rate cut stimulus drives demand, will have to wait much longer—the cheapest mortgage rates are currently moving in the wrong direction.
Canada’s Largest Real Estate Markets Saw Further Demand Erosion
Only major markets have reported real estate sales, but it appears the slump is worsening. Home sales in Toronto (-13.3%) and Vancouver (-18.5%) fell in May, from the already weak data reported last year. Both fast-growing cities with global demand reported some of the weakest sales on record.
“The short story is that conditions remained difficult in those markets in May, but they are at least not getting any worse,” quips Robert Kavcic, the senior economist at BMO who authored the research note.
That’s one way to look at historically low demand.
Canadian Real Estate Buyers Are In Control With Such Weak Demand
Weak sales in both regions helped the already growing inventory increase further. The bank highlights that the sales to new listings ratio (SNLR) for both cities is now below 40%. Toronto’s SNLR fell below 30%, marking the worst demand balance for May, ever recorded in the region.
Source: BMO; REBGV; TRREB.
An SNLR below 40% indicates a buyer’s market, where prices are expected to fall until demand firms. Despite prices not budging all that much these days, Kavcic notes that buyers are in control here.
Canadian Mortgage Rates Unlikely To Provide Buyer Stimulus Soon
Real estate always has a buyer, it’s typically just a matter of the right price. The right price can be obtained two ways: lower home prices or more leverage. Sellers have been resistant to cutting prices, hoping that rate cuts would provide enough cheap leverage to draw buyers back into the market.
The Bank of Canada (BoC) decision to hold rates yesterday means sellers will have to wait to test that theory. According to BMO, that places the average variable rate mortgage rate between 4.25% to 4.50%—give or take a few basis points for risk and the borrower’s profile. The lowest available rate is the 5-year fixed, around 4%, influenced by the 5-year GoC bond yield. Those yields have been climbing with rising inflation expectations, which Kavcic suggests leaves “… little further relief there, either.”
“We’ve been suggesting for a while that a break in mortgage rates meaningfully below 4% would put some life into the market, but we’re still not there,” warns Kavcic.
That possibility will linger out of reach until inflation expectations cool down. If they cool, it could signal a broader economic downturn—posing a different challenge for buyers.