Canada’s realtors are hinting that home prices may have found their bottom.

The February numbers from the Canadian Real Estate Association show price, as measured by the Aggregate Composite MLS Home Price Index (seasonally adjusted), was flat compared to January.  That ends a five month slide in prices, which dropped 1.3% between December and January.

The national average price of a home in February came in at a little less than $686,000, up 3.5% year-over-year.

Sales were up almost 20% from last February, but it has to be remembered that February 2023 was an unusually slow month.  Compared to January sales dipped 3.1% in February.

CREA is hopeful the stabilization of prices signals an impending reversal in demand.

“The fact that prices were unchanged from January to February was noteworthy given the … drop from December to January.  Shifts this abrupt are exceedingly rare.  There have only been three other times in the last 20 years that have shared a sudden improvement or increase in the month-over-month percentage change … of this size; all at various points in the last four years when demand was coming off the sidelines,” CREA said in its release.

New listings rose 1.6% in February compared to January, bringing the sales-to-new listings ratio to 55.6%. The long-term average is 55%.

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Some good news from Statistics Canada.  Canadian households were wealthier in the 4th quarter of 2023.

The federal number-crunchers say household net worth rose by 1.8%, largely because of stronger financial markets.  Both bonds and stocks rallied from slumps experienced in the third quarter.  Net worth is the value of all household assets, minus all liabilities.

Over the year as a whole, 2023 saw household financial assets increase by 7.0%, with non-financial assets rising 1.8%.  Financial liabilities also increased, climbing 3.4%.  That is the slowest accumulation of household debt in a calendar year since 1990.

The household saving rate was up.  It came in at 6.2% in Q4 of 2023 compared to 5.6% for the same period a year earlier.

Canada’s hefty debt-to-income ratio eased slightly in the 4th quarter, dipping to 178.7% from 179.2% in Q3.  So, Canadian households still owe about $1.79 in debt for every dollar of disposable income.

Residential real estate has been holding its own, although the market has been inconsistent.  The value of residential real estate declined 1.9% in Q4, the second drop in a row.  However, for the entirety of 2023 value increased by 1.8%, due to stronger performance in the first half of the year.

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We are back from a brief holiday hiatus and there are a few things to update.

Home sales and prices both continued downward according to the Canadian Real Estate Association.  Sales dipped 0.9% compared to October and year-over-year figures showed the same decline.  Prices came down 1.6% month-over-month, but the national average price is 2.0% higher than a year earlier, at just under $657,000.  CREA’s preferred measure of pricing, the MLS Home Price Index, showed a 1.1% decline from October, with a 0.6% increase compared to November of ’22.  The sales-to-new listings ratio continued to tighten as well.  The number of newly listed homes fell 1.8% month-over-month in November.  The pace of new housing starts dropped 22% according to Canada Mortgage and Housing Corporation.

The economy as a whole is also sluggish.  Gross Domestic Product numbers for the third quarter showed a 1.1% contraction, year-over-year.  But StatsCan made an upward revision to the Q2 numbers and a technical recession was avoided.  Q2 showed a 1.4% increase.  All in all it was enough to keep the Bank of Canada on the sidelines.  The central bank held its Policy Rate at 5.0% for a third straight setting.  Now market watchers have their sights set on the horizon, looking for signs of interest rate cuts.

Competition in the mortgage market may have diminished.  The federal finance minister Chrystia Freeland has approved RBC’s takeover of HSBC.  The $13.5 billion dollar deal is expected to close sometime in the first quarter of this year.  Well known mortgage commentator Rob McLister calls it a sad day for mortgage customers.  He calls HSBC an “everyday, low-cost lender” that gave borrowers some “leverage” against the big banks.

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The Bank of Canada has held its trendsetting interest rate at 5.0% for a third straight setting and talk of further increases has been all but silenced.

In the statement that came with the most recent rate announcement, The Bank offered a number of reasons for the decision to hold steady:

• higher rates are “clearly restraining spending”
• the economy “is no longer in excess demand”
• the general economic slowdown is reducing inflationary pressures

Even though The Bank said it will hike again, if necessary, most market watchers are looking into their crystal balls trying to predict when, and by how much, The Bank will be cutting rates.

The general consensus right now is for a quarter point (25 basis point) cut in April.  There are some who expect to see it a little earlier, in March.  Others say it’ll be June.

The projections for overall cuts in 2024 range between 1 and 2 full percentage points.

The Bank of Canada still has some inflation concerns, in particular, core inflation which continues to run in the 3.5% to 4.0% range.

Headline inflation, also known as the Consumer Price Index, is 3.1%; tantalizingly close to The Bank’s 1.0% to 3.0% target range.

The Bank will also be keeping a close watch on the job market.

The next interest rate announcement is set for January 24, 2024.

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Two key guide posts for the Canadian economy are pointing in the same direction.  Both the third quarter GDP numbers and November jobs figures suggest the Bank of Canada is unlikely to make any changes to its trendsetting interest rate in the coming days.

Canada’s economy shrank at an annualized rate of 1.1% through July, August and September.  That was a bigger decline than expected.  Market watchers had been looking for a modest 0.2% increase.  The Bank of Canada had forecast a 0.8% gain.  The country avoided falling into a technical recession though, because the Q2 reading was revised upwards to a 1.4% gain.  It had initially been posted as a 0.2% decline.  Nonetheless the economy has been on a slowing trend for several months.

The economy added more jobs than expected in November, but the unemployment rate went up.  There were nearly 25,000 jobs added, beating the forecast of 15,000.  However, that did not keep up with the country’s population growth.  Unemployment rose to 5.8%, from 5.7% in October, because there are more people looking for work.

These are the last two major economic data points before the Bank of Canada makes its December rate announcement this week.  When combined with the latest inflation numbers (up 3.1% y/y in October) the Bank appears to have all the reasons it needs to hold its policy rate at 5.0%.  That rate has not moved since July and the market focus has now shifted away from further increases and toward when there could be cuts.

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There has been a little relief for mortgage shoppers in recent days.  Fixed-rates have come down slightly, led by declining yields for government bonds.  Variable-rate mortgages appear to be maintaining their discounts and most market watchers believe the Bank of Canada has reached the top of this rate-hiking cycle.

The Bank, however, continues to warn that Canadians should be preparing for interest rates to remain higher for longer.  Senior Deputy Governor Carolyn Rogers made that point again during a recent speech in Vancouver, saying it is important to adjust proactively to that possibility.  Rogers cited a number of global considerations for higher rates including: China and other developing nations joining the worldwide economy; a decline in attractive investment opportunities for businesses; and an overall, international, adjustment to higher rates.

It is also useful to remember that central banks around the world have been working to normalize interest rates that have been at historic lows since the 2008 financial crisis.

Rogers offered some reassurance that Canadians are adjusting to higher rates.  Household credit growth has dropped to its slowest pace since the early ’90s.  Delinquency rates on credit cards and other consumer loans are only slightly above pre-pandemic levels.  Mortgage delinquencies are below pre-pandemic levels, and that is despite about 40% of all mortgage holders having already renewed at higher rates, with bigger payments.

As to when interest rates might actually start falling?  The BoC’s Q3 survey of “Market Participants” suggests they are adjusting to the higher-for-longer scenario. Based on the median response they are expecting a quarter point drop in April, 2024.  That is a month later than expectations expressed in the Bank’s Q2 survey.

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An interesting difference of opinion has developed between the economists and the people who deal in the bond markets.  The economists do not expect to see any rate cuts by the Bank of Canada until the middle of next year.  But the markets see things changing sooner.  And there may be benefits for mortgage shoppers.

The Bank of Canada has been trying to wrestle inflation back to its 2.0% target by raising interest rates to slow the economy.  There have been 10 hikes since March of 2022 and they appear to be delivering the desired results.  Inflation is down.  Household spending is down.  Employment is down and GDP growth is down.  For two settings in a row, the Bank of Canada has held its trendsetting rate at 5.0% and there is little indication that any further increases are coming.

Even though the BoC does not expect to see inflation back at 2.0% until mid-2025, some recent comments by the Bank’s bosses have the bond markets looking for rate cuts.  Both Governor Tiff Macklem, and Deputy Governor Carolyn Rogers, told the federal finance committee cuts could start before the 2.0% target is hit.

Since then, yields on 5-year, Government of Canada bonds — which are the basis of fixed-rate mortgage interest — have dropped more than 30 basis points (0.3%) to 3.79%.  Yields are down more than 60 bps (0.6%) from highs reached in early October.  That has some market watchers forecasting declines in fixed mortgage rates of 20 to 40 bps over the very near term.

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An interesting new survey suggests a growing number of Canadians may be getting ready to move back into the housing market.

The newly launched survey by Dye and Durham indicates one in ten are looking to sell their primary residence and move into a new one within the next 12 months; double the number who made the move in the past year.

The number of respondents planning to expand their holdings is also up significantly with 8.0% saying they intend to buy an investment property or vacation home in the next year.  That is nearly double the 5.0% who did so in the past year.  First-time buying decisions are also getting stronger.  Eight percent of respondents expect to jump into the market, up from 4.0% who actually made a purchase in the last 12 months.

The sidelines of the housing market will still be crowded though.  The survey suggests 23% of Canadians will bide their time until interest rates come down.  Nearly a quarter (24%) say they are waiting for prices to ease.

A separate survey of people who have bought a home in the last 4 years (by a popular real estate marketplace) shows that the buying decisions of 93% of respondents were influenced by rising interest rates and competitive markets.  At the same time 43% said they wanted to buy before prices increased further.

Nearly a third (30%) of the respondents say their finances are tight right now, with 10% saying they are unable to meet basic needs.  Still, they do not regret their purchase with 45% saying they will still be happy even if there is another interest rate increase this year.

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