Canada’s real estate industry is a little overenthusiastic about last month’s market data, according to one of the country’s largest banks. A new BMO Capital Markets report explains that weak sales and rising inventory persist, suggesting pricing will remain sluggish in the near term. The bank warned investors that real estate corrections are measured in years, not months.
Canadian Real Estate Demand Suggests Prices To Remain Sluggish
The Canadian real estate industry reported a minor improvement in sales last month. Seasonally adjusted home sales made a monthly climb of 3.5% in May. However, the bank highlights an almost equal increase in new listings (+3.1%), leaving the sales-to-new listings ratio (SNLR) at a similar level.
The SNLR is a fundamental indicator used by the industry to measure relative demand. When the ratio falls below 40% the market is said to be a buyer’s market, where prices are expected to fall. It has a strong historical track record.
“So, unsurprisingly, the key sales/listings ratio barely improved from soft levels. And that suggests pricing will remain sluggish,” explains Douglas Porter, Chief Economist at BMO.
It’s worth noting that these are seasonally adjusted numbers being discussed. While May showed an improvement compared to April, in unadjusted terms home sales were 14% below last year. This indicates the month might be an improvement over April, but sales were worse than last May. But we digress, back to BMO’s take.
Canadian Real Estate Corrections Are Measured In Years, Not Months
CREA, the organization that represents Canadian Realtors, suggested price declines may end soon. Their assumption is based on seasonally adjusted monthly sales rising, and slowing price declines in many markets. BMO argues the SNLR disagrees with that take.
“The accompanying chart [above] smooths out that sales/listings ratio over a three-month period. It’s a good leading indicator for prices, and on that basis, things are still looking south,” explains Porter.
CREA suggests a turnaround may be forming. This was largely based on seasonally adjusted sales rising month-over-month, and price declines shrinking in some regions. If that sounds a little optimistic based on those two indicators, you’re not alone.
“CREA made a point that the decline in prices may be ebbing. That may be correct, but the reality is that they are still ebbing,” notes Porter.
He reminds investors that prices have dropped for five consecutive months, are down over 3% from last year, and 17.5% below the record high hit 3 years ago. It takes a big leap of faith to counter that with a single month’s increase in home sales, and smaller price drops.
“At that time [in 2022], we opined that bear markets in Canadian housing are measured in years, not months. The market balance measures agree,” warns Porter.
How long do Canadian housing corrections last? 🧐 #ToRe #VanRe https://t.co/OwDJIOkjK5 pic.twitter.com/9jwQg4XuYe
— Better Dwelling (@BetterDwelling) May 24, 2022
It’s unclear if Porter is referencing a specific report, but BMO produced a few around the 2022-peak. In one report, they found that historical corrections have taken between 2 and 15 years to run its course, depending on severity. They also specifically noted that Ontario real estate prices resemble the ‘80s bubble, which lasted 6 years from peak. Considering affordability has been stretched to one of the worst levels on record, ending as one of the shortest corrections on record would be surprising.