Canadian home sales have been slipping back from record levels reached in the first-quarter of 2021. Anthony Okolie speaks with Rishi Sondhi, Economist, TD Bank, about whether we’ve reached a peak, or if there is still more upside for the real estate market.
Rishi, in your recent report, you say the Canadian Housing Market is unwinding sooner than expected. So how far have home sales declined from their peak?
Hi, Anthony. Yeah, they're down about 25% from their peak in March, so they've come down from the absolute peak of a mountain. But I think it's important to remember that, at least in June, home sales are still very, very elevated, still extremely high.
In fact, if you took June's level and you assume that it sort of lasted through the entire day of the year, it would have beaten 2020's level by a comfortable margin. So it's still a very hot market out there, if not as hot as we saw a few months ago.
OK, so that's good to know. But what are some of the potential headwinds for the Canadian housing activity?
Yeah, so we think that Canadian bond yields are on course to grind higher moving forward. And that's a function of a few things-- robust economic growth and reopenings, some inflation risk, and the chance that the yields grind higher in the US. So that could put some upward pressure on interest rates in the economy, which could slow housing to some extent.
There was also the stress test that was implemented on June 1, or I should say tightened on June 1, excuse me. So what that means is that it made it a little bit more difficult to qualify for mortgages. So we think that is weighing on activity to some extent and should continue to do so in the near term.
So despite these challenges, again, you're still forecasting sales to remain healthy. Why is that?
Yeah, so there's several sort of reasons behind that. Firstly, economic growth is likely to be strong moving forward, so that will help employment growth and income growth, we think.
Secondly, we think population growth will pick up in the second half of the year, so that'll be supportive for housing demand. Also, Canadians are sitting on a mountain of excess savings accumulated during the pandemic. And some survey data from the Bank of Canada indicates that about 10% of these savings are going to be funneled towards down payments. So Canadians have a lot of savings, some of which they can put towards new homes.
So, Rishi, talk to us about home prices. What's happening there?
Yeah, I mean home prices have been on an extremely strong run. I mean, I don't think that's news to anybody that might be watching this particular video. But in the second quarter, they're actually dipped a little bit. So home prices came off the boil a little bit in the second quarter.
And in fact, since March, home price growth has moderated or declined across all provinces in Canada, with the exception of Newfoundland Labrador where home price growth is still quite robust.
And talk about the condo market. How has it fared during this bit of a market slowdown?
Sure. Well, one of the interesting things about home prices is that when we talk about home prices, we talk about average home prices. So average home prices can be influenced by transactions that happen either on the higher end or the lower end of the price spectrum.
So condos, in general, are less expensive than their single detached counterparts. And what we've seen is that we've seen condo sales tick higher from their pandemic depths sort of as we move forward, and their affordability, vis-a-vis their detached counterparts, has improved drastically. And investor demand has come back and the like. So sales of these relatively lower-priced units have outperformed, which has put downward pressure on average prices.
So given all these moving pieces, what's your outlook of the housing activity over the next few years?
Sure. So with respect to home sales, we think home sales are going to continue to normalize. As I mentioned, before March they were at absolutely peak, very extremely high levels. They've already come off 25%, but they're still historically high. So we think there's some further room for normalization there, and we expect the sales to sort of grind lower as the year progresses.
But as we mentioned earlier in the interview, we expect the level of activity to remain healthy. Now, with respect to prices, we think that as condo sales continue to consume a rising share of the overall sales pie, we think that will put some downward pressure on average prices, again, because condo prices are relatively inexpensive.
Also, this cooling demand backdrop, we think, will take some of the steam from price growth as well. And finally, we're expecting listings to pick up in the third quarter a little bit as COVID-19 fears are more in the rear view window and the price environment is quite robust. And that should help with market balance and help, again, take some steam from prices.
So overall, we expect more modest gains, more modest growth and prices going forward. So the really steamy games and frothy games that we saw from May of last year through the first quarter of this year we think are going to be in the rear view window.
Rishi, thank you very much for joining us.
Thank you so much, Anthony.