
The Canadian housing market has experienced a “huge” second quarter (Q2), surpassing expectations with soaring home sales and average prices. However, economists at TD Economics are cautioning for a potential decline in sales during the latter half of 2023, which could reverse part of the market’s recent strength.
Rishi Sondhi, an economist at TD Economics, sheds light on the impact of this robust performance in the Provincial Housing Market Outlook.
Previous projections had suggested that sales were falling short of levels aligned with underlying fundamentals like income and population growth. However, the surge in recent sales has bridged this gap. Nevertheless, the sharp rise in prices raises concerns about affordability, which could potentially dampen future market activity.
Bank of Canada’s influence
The Bank of Canada has recently raised its policy rate after a four-month pause, driven by resilient housing and consumer spending data. TD economists now project another 25 basis points hike, injecting a total of 50 basis points of tightening by the end of July—deviating from earlier expectations.
This higher policy rate directly impacts affordability, and a more hawkish stance from the central bank is likely to cool buyer sentiment.
Anticipated decline in home sales and prices in the second half of 2023
TD Economics predicts a decline in Canadian home sales during the latter half of 2023. Moreover, the pace of purchase growth in 2024 is expected to be slower than previously anticipated. Due to tight markets and restrained supply, Sondhi expects average price growth to remain positive in the third quarter; however, a slight drop in prices is forecasted for the fourth quarter. As a result, the quarterly growth profile for both sales and prices in 2024 has been adjusted downward compared to the earlier March forecast.
Factors shaping the outlook: Central bank policy, bond yields, and population growth
In light of the challenges mentioned above, Sondhi raises an important question: “Given the headwinds, why are we still forecasting growth in sales and prices next year?”
The economist points to the expected reduction in rates by the Bank of Canada in the second quarter of 2024, which, coupled with lower bond yields, is likely to stimulate the market. Furthermore, rapid population growth and positive income gains are anticipated to persist, despite potential increases in the unemployment rate.
The resale market in Canada is currently grappling with low supply, with new listings in May around 16 per cent below the post-GFC average. Sondhi explains that healthy job markets and the ability to extend amortizations have prevented forced selling. However, poor affordability may be discouraging move-up buyers.