The wind is definitely shifting—and becoming a lot chillier—for Canada’s housing market. Toronto, Vancouver, Montreal, Ottawa and Hamilton were among the areas experiencing significant pullbacks in home resale activity in May. For many of them this represented the third-straight month of decline. Clearly the Bank of Canada’s interest rate hikes since March—and the prospects for more in the months ahead—are changing the game in a big way. They’re considerably raising the bar for buyers, and dragging down earlier (super) bullish sentiment in the process.

With demand softening, inventories are now on the rise in some markets (including Toronto and Montreal). This is quickly easing what were extremely tight demand-supply conditions just a few months ago. In fact, most major markets in Canada have returned to balanced territory in May based on sales and new listings reported by local real estate boards.

The chillier wind brought home prices lower in many markets last month. This group included Toronto, Vancouver and the Fraser Valley. We expect further reversal of the massive pandemic-era gains in these and other markets in the period ahead. Interest rate hikes straining affordability and weighing on property values, especially in expensive markets.

 

Toronto area—The frenzy is over

It’s been a dramatic turn of events for the Toronto-area market over the past three months. Demand-supply conditions swung from close to the tightest on records to nearly as loose as they were during the 2017 correction. High interest-rate sensitivity (due to the area’s steep prices and large mortgage sizes) has put buyers on the defensive in the face of the Bank of Canada’s rate hike campaign. Home resales have plummeted by a third in the past three months, including a 9.3% m/m drop in May (on a seasonally-adjusted basis). After spiraling down to historical lows during the pandemic, inventories are picking up, rising 26% above year-ago levels in May. Buyers’ sense of urgency has significantly diminished, and so has their willingness to enter into bidding wars. The MLS Home Price Index fell m/m in both April and May. Single-detached home values in the 905 belt—which had escalated the most in the past year—are seeing the stiffest headwinds. Condos in the City of Toronto, on the other hand, have been more resilient. We expect prices to remain on a downward trajectory as buyers gain pricing power.

 

Montreal area—Landing softly

The market has been on a landing path for some time with activity moving below (strong) pre-pandemic levels a year ago and sustaining a modest downward trend ever since. In May, we estimate home resales further edged 2% lower m/m (seasonally-adjusted). The bigger development was a sharp increase in new listings last month. This brought demand-supply conditions much closer to balance—though inventories remain scarce. If sustained, we think growing supply would set the stage for a softening in prices. To date, Montreal-area properties have continued to gain in value, albeit at a diminishing rate. Island of Montreal prices have faced more resistance of late, while median prices in Laval, and the North and South Shores have sustained comparatively stronger momentum. We expect rising interest rates will further moderate demand and keep activity trending lower.

 

Vancouver area—Passing the peak

Last month provided the strongest evidence yet the Vancouver market has peaked this cycle. Home resales fell more than 15% m/m (by our own seasonally-adjusted estimate) and the MLS HPI declined close to 1% m/m for the first time in two years. Importantly, while inventories were still down relative to a year ago, they moved higher. Demand-supply conditions eased significantly and have become more balanced. We expect demand to cool further amid rising interest rates. Vancouver buyers are the most rate sensitive in the country and will be seriously challenged by the Bank of Canada hiking by an additional 100 basis points as we anticipate. This would exacerbate already intense affordability stress. As they gain a stronger negotiating hand, we see buyers extracting more price concessions from sellers. We also believe that they focus on less expensive options such as condos.

 

Calgary—Still busy

Activity may have calmed down in the past three months but things are still incredibly busy in the Calgary market. Home resales continue to hover well above pre-pandemic peak levels and supply remain far insufficient to meet demand. Nonetheless, local buyers aren’t immune to rising interest rates and this may be dialing down the degree of competition between them. Home prices were little changed in May with the MLS HPI rising only marginally from April, marking a sharp deceleration from previous months’ gains. We expect price trends to moderate in the period ahead yet stay well supported by solid fundamentals. The outlook for Alberta’s economy is bright thanks in part to a tremendous turnaround in the energy sector. In-migration is rebounding is a significant way. And despite eroding in the past year, housing affordability remains good in Calgary, especially compared to other large Canadian cities. We see these factors sustaining solid demand for housing in the period ahead.

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Robert Hogue is a member of the Macroeconomic and Regional Analysis Group, with RBC Economics. He is responsible for providing analysis and forecasts for the Canadian housing market and for the provincial economies. His publications include Housing Trends and Affordability, Provincial Outlook and provincial budget commentaries.

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