Bringing Down The House

Happy Monday Morning!

Higher interest rates continue to slow the nations housing market. National home sales, as reported by CREA, fell 25% year-over-year in the month of August. It was also the sixth consecutive monthly decline in home sales. While new listings remain weak as sellers resist selling at recent valuations, inventory is still climbing and prices continue to move lower.

The national home price index fell another 1.6% month-over-month in August. The index measures the price of a “typical home” and suggests the typical home has dropped by $108,000 since peaking in March. National prices have now declined 12%, the steepest correction since the index was created in 2005.

Of course, there is no national housing market per se, but from a larger macro perspective this kind of move is significant. House prices are dropping across the nation, here’s how the correction looks year to date:

1. Greater Toronto Area -15%

2. Ottawa -11%

3. Greater Vancouver -7%

4. Montreal -6%

5. Calgary -2%

Remember, this exactly what the Bank of Canada wanted. Housing is the economy and it’s rolling over, hopefully enough to bring inflation down with it. Per Stats Canada, households lost nearly $1 trillion of net worth in the second quarter as house prices tumbled.

The value of residential real estate holdings held by households fell by $419 billion in the three months between April and June. It was the largest quarterly decline on record.

Source: Ben Rabidoux

The Bank of Canada is still poised to hike rates again in October. In other words, the beatings will continue until morale improves. Yes, they left monetary conditions too loose for too long, and now they’re over tightening.

It’s going to take a recession to get inflation down to target, and potentially a deep one, there’s no need to sugar coat it. But alas, inflation will come down, and housing is the sacrificial lamb this time around, an inconceivable thought for many Canadians who have enjoyed a nearly thirty year bull market in housing.

So what’s it going to take?

Macro Alf on Twitter posted some interesting research. He went back 100 years and looked at all 16 US recessions during that time. In all 11 episodes when we entered a recession with inflation above 3%, the resulting sharp economic slowdown did bring inflation down.

On average it took 16.2 months to slow CPI from peak back to 2%. The peak-to-trough reduction in CPI was -6.8%.

Source: Macro Alf

So how about today? If we get the average recession today, history suggests we'd be able to lower CPI from roughly 9% to 2% in about 16 months. That brings us to roughly the end of 2023.

Certainly not a perfect science, but perhaps provides a roadmap of what we can reasonably expect.

Until then, I expect more stress to come.