It has been a challenging year for the Canadian housing market as a combination of factors – a surge in prices in 2021 and the early part of 2022, sharply higher mortgage rates, tightening lending standards – led to one of the sharpest 12-month downturns in prices on record:

As you can see, the Canadian housing market has been a pretty smooth ride for the better part of the past two-decades. Up until the end of 2019, prices had compounded at ~7% annual rate (we would note that this is a very high rate of growth), but then COVID led to a sharp downward correction in the growth rate of prices. This was very quickly offset by a rapid surge in prices that began in the back-half of 2020 and extended into the first quarter of 2022. Let’s modify the above chart a bit to get a clearer picture of the magnitude of the rise in 21/22 and then the magnitude of the drop over the past 12-months:

As you can see, the 31% surge in prices from early 2021 through early 2022 was truly unprecedented. However, this, in turn, was followed by a drop in prices that, while only about half the magnitude of the 21/22 run-up, was still about twice the largest drop we had seen in the past two-decades.

So, is the worst now behind us? While we would always caution against drawing conclusions based on a couple of months of data, we would note that prices bottomed in February, but have since begun to rise. In fact, after a very tough start to 2023, prices are now flat for the year. For its part, RBC Economics believes that we may have seen the bottom in housing. The main drivers of this view are: 1) supply remains very tight as sellers have yet to reenter the market (although rising prices will likely change this):

And 2) resales have been surging in key markets such as Toronto (27% m-o-m) and Vancouver (25%), which could be the canary in the coalmine for the rest of Canada.

RBC Economics sees upside risks: RBC Economics acknowledges that “April’s widespread vigor [was] a surprise to us.” They add that while they expected the market to reach its cyclical bottom this spring, they thought it would take a while for “the heat” to return. From here, RBC Economics believes it will be a push/pull between negative forces – poor affordability driven by still high prices and mortgages rates, poor dynamics for first-time homebuyers – and positive forces - soaring immigration, which is fueling household creation and a boiling hot rental market that makes buying more attractive.

Impact on Canadian Economy: Canada has become somewhat unique in the impact of housing on the overall economic narrative. While housing matters in all countries to varying degrees, because of the high level of indebtedness in Canada and the importance of housing investment to the asset side of many Canadians’ balance sheets, swings in housing prices can have a very big impact on spending trends and overall confidence in the economic backdrop.

As pandemic era assistance continues to ease off, high indebtedness and higher borrowing rates have become to show up in credit statistics with some signs of deterioration. Stabilizing home prices will ease this burden to some degree; although, the ultimate cure will likely need to see borrowing rates come down, which could be some ways off.

Impact on the Canadian Stock Market: While many Canadian business will “not care” about the state of the housing market, the Canadian banks, which make up ~25% of the S&P/TSX, will obviously care quite a bit. Most banks reported this week and while credit conditions remain favourable (mortgage default rates remain near historic lows), overall results were quite poor in part because demand for loans is down and thus industry revenues are suffering.

Final Thoughts: Any signs that housing is turning is an important first step in a more positive outlook for Canada (a necessary condition, but not a sufficient condition to a positive outlook). Recession risks remain high, so our overall outlook remains cautious in the near term, but we think the table is being set for a potentially very positive 2024 as a combination of a strong housing market, falling interest rates, and an improving economy drive Canadian-linked assets – the stock and bond markets, the dollar – higher.