Sluggish September Sales Attributed to Prolonged Interest Rate Expectations

In September, Canadian home sales decreased for the third consecutive month, and the organization responsible for the data, the Canadian Real Estate Association (CREA), has adjusted its yearly predictions.

They now predict a 9.8% drop in sales for 2023, down from the 6.8% decline forecasted in July. This downward revision is primarily attributed to reduced expected sales in Ontario and British Columbia, reflecting CREA’s belief that interest rates will remain high for an extended period. The forecast for the average home price across the country has also been adjusted. CREA anticipates a yearly decrease of 3.3%, bringing the average price to $680,686 ($497,614). This revision results from reduced sales and pricing trends observed since the summer. CREA explained that these trends, coupled with expectations of a softer market in the future and the likelihood of interest rates remaining elevated for an extended period, have influenced this updated forecast. The Bank of Canada recently raised its policy rate in July to 5%, its highest level in 22 years, and maintained it last month. Money markets are leaning towards another potential rate increase in the upcoming months.

The key highlights

  • National home sales dropped by 1.9% in September compared to the previous month.
  • In September 2023, the monthly activity was 1.9% higher than in September 2022.
  • The newly listed properties saw a substantial 6.3% increase from the previous month.
  • The MLS® Home Price Index (HPI) showed a slight 0.3% decrease from the previous month but increased by 1.1% from last year.
  • The actual national average sale price, not adjusted for seasonal variations, increased by 2.5% compared to September of the previous year.

Buyers hesitant about interest rates choose to wait instead of getting involved.

With the ongoing imbalance between low housing inventory and high demand in Canada, the market’s future trajectory hinges on interest rates. The uncertainty regarding the possibility of further rate hikes and the current cost of borrowing is likely to persist, keeping potential buyers in a holding pattern. A quieter winter is expected, with all eyes on the Bank of Canada. The recent trend of declining sales and increasing listings presents opportunities for buyers. However, many buyers seem content to wait on the sidelines until more clarity on interest rates. This, combined with sellers who aren’t under immediate pressure to sell, suggests that the market will likely remain subdued until the following year. The overall months of inventory, a measure of how long it would take to sell all available homes at current market conditions, increased to 3.7 months in September, up from 3.5 in August. Despite this rise, it remains lower than levels seen in the second half of 2022 and the long-term average of about five months. As sales fell compared to new listings, competition among buyers slightly cooled, with the sales-to-new-listings ratio (SNLR) declining to 51.4% from 55.7% in August. This is the first time the SNLR has dipped below its long-term average of 55.2% since January, indicating a shift toward more balanced market conditions. The market had seen its peak SNLR in April at 67.8%, reflecting the heightened competition.

CREA changes its prediction due to the expectation of rates staying high for an extended time

Buyers appear to be cautious in the current environment of higher interest rates, leading to a lack of enthusiasm in the housing market this fall. Traditionally, housing markets are most active in the spring, with some increased activity in the fall. However, despite a surge in new property listings since Labor Day, this has yet to translate into higher sales. CREA points out that the national sales-to-new listings ratio has dropped significantly in just five months, indicating a cooling market. Price increases have also slowed, particularly in Ontario, where they have reversed altogether. CREA’s updated forecast predicts 449,614 home sales in 2023, marking a 9.8% decline from 2022. However, sales are expected to rebound by 9% to 490,257 units in 2024 as interest rates begin to trend lower, bringing activity close to pre-pandemic levels. The national average home price is expected to drop by 3.3% annually to $680,686. This revision is primarily due to lower sales in Ontario and British Columbia, Canada’s two most expensive provinces for real estate. Looking ahead, home prices are forecasted to increase by just 1.5% from 2023 to 2024, with Alberta leading the way with a 4.8% price gain, while other provinces are expected to experience modest growth in the range of 1% to 2.5%. The housing market’s future is closely tied to the evolving interest rate landscape and buyer confidence.  Prices will stay the same for the next year. They’re expected to go up by just 1.5% from 2023 to 2024, reaching $690,916. Alberta will see the biggest price increase at 4.8%, while Ontario won’t see any growth. Other provinces are expected to have modest price growth between 1% to 2.5% in 2024.