Canadian housing market is “comin’ down the mountain”: economist

Tighter stress test rules and “eroding affordability" should continue to push sales lower, TD Economics says


TD Economics says Canadian housing sales have “begun their correction in earnest.”

And as far as bank economist Rishi Sondhi is concerned, the “interesting question becomes how steep the decline will be.”

A correction is a small decline.

As Sondhi wrote in a report on July 28, tighter stress test rules, which started in June this year, and “eroding affordability should continue to push sales lower moving forward.”

But people expecting the market to crash and burn shouldn’t hold their breath.

“At the same time, however,” Sondhi stated, “high household savings rates, rising incomes and stronger population growth will likely keep sales well above their pre-pandemic levels.”

Sondhi noted that since March 2021, Canadian home sales have dropped by 25 per cent.

“As it turns out,” the bank economist wrote, “March seems to have been the absolute peak of the mountain in terms of activity, a couple of months ahead of what we had anticipated in our outlook released last winter.”

Nationally, the Canadian Real Estate Association has reported that home sales in June dropped 8.4 per cent compared to May.

The decline marks the “third straight monthly slowdown since activity hit an all-time record back in March,” the CREA noted.

Interestingly, Sondhi’s report is titled: Canadian Housing Outlook: Comin’ Down The Mountain.

“Home sales are unwinding from their stratospheric first-quarter levels,” the economist started the report.

Sondhi noted that the pace of Canadian home sales in the first quarter of 2021 was clearly “unsustainable.”

“The question was how long it would hold up,” Sondhi remarked.

The TD bank economist looked at factors that will infuence the market. One is the tighter lending rules for uninsured mortgages, which took effect on June 1 this year.

Sondhi described the new rules as a “near-term headwind.”

Second, “an upward trend in bond yields will likely reassert itself, taking mortgage rates along for the ride.” TD Economics expects the Bank of Canada to raise its interest-setting rate in 2022, but “only once.”

Hence, “Increases in borrowing rates over the forecast horizon are likely to be relatively modest and gradual.”

Overall, the bank’s new housing outlook anticipates the Canadian housing market to “remain healthy.”

A total of 140,000 homes are projected to be sold throughout 2022.

“For one, robust economic growth should support rising job growth and household incomes,” Sondhi wrote.

Second, the TD economist expects “population growth to pick up in the second half of the year, supporting investor demand.”

“Lastly, households have a mountain of excess savings to deploy (estimated at over $240 billion as of the first quarter of 2021), and the latest Bank of Canada Survey of Consumer Expectations suggests that Canadian households plan to funnel 10 per cent of these excess funds into down payments,” Sondhi wrote.

This story originally appeared in the Georgia Straight.

@carlitopablo

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