Strong housing activity in Canadian real estate sector masks weakness elsewhere

Following two months of modest contractions, a 1.8% increase in existing home sales in October takes sales back to the peak reached earlier this year.

Listings rose a more modest 0.9%, resulting in tighter market conditions. The existing home sales-to-listings ratio edged higher to 57.9 - a ratio between 40 and 60 indicates balanced market conditions. Meanwhile, the months of inventory fell to 5.5, from 5.7 in September. The Canadian real estate association noted that market conditions in October were the tightest they had been in over 6 years.    

Overall home sales continued to be boosted by markets in Ontario and B.C., many of which are in seller's territory, meaning listings for existing homes are low relative to demand. As such, average existing home prices rose by 8.3% year-over-year in the month overall, but only by 2.5% when you strip away Toronto and Vancouver. On a quality adjusted basis, the MLS home price index rose 6.7% year-over-year, with double digit home price growth in markets across Ontario and B.C., but little growth elsewhere. Single-family homes (+8.7%) continue to dominate home price gains, but price growth for apartments (mostly condos) also accelerated to 4.4% year-over-year in October, from 4.2% in the prior month. 

Markets in oil-producing provinces continue to remain incredibly weak, with sales down 36.2% year-over-year in Calgary, 16.3% in Edmonton, 12.3% in Regina and -21.8% in Saskatoon. Home prices have also started to tumble in these markets, and were down the most in Calgary (-4.4%) and Regina (-4.6%).

Canada's hot housing market days may be numbered. October is the month we expected the impact of low interest rates to start to fade. And indeed, despite continued gains in Ontario and B.C., many markets across Canada have geared down following the interest-rate induced pop in home sales earlier this year. The Canadian real estate board mentioned that sales were only up in half of the markets this month, and most of them concentrated in B.C. and Ontario. It is possible that the elections created some volatility in both B.C. and Ontario and October could have represented a post-election pop following three months of depressed sales.   

The pace of existing home sales and price gains in Ontario and B.C remains largely inconsistent with underlying economic conditions.  Any continued strength going forward, may result in a deeper moderation further down the road.

"Interest rates are likely to go up very gradually, elevated home prices and debt levels have left Canadian households far more vulnerable to small changes in interest rates than they have been in the past. As such, we continue to anticipate a sharp moderation in housing activity next year as interest rates head higher", says TD Economics.