Waiting for a Pivot

Happy Monday Morning!

More housing data trickling out of Canada’s two largest major metros. Greater Vancouver home sales fell 46% year-over-year. It was one of the slowest Septembers on record, other than 2008, 2012, and 2018. Prices are still moving lower, albeit mostly in suburban markets which saw excessive price gains during the pandemic.

For example, the median sales price of a detached home in the Fraser Valley inflated by $800,000 from February 2020 to February 2022. Since peaking, prices have dropped a whopping $455,000, giving back a good chunk its initial gains.

What’s perhaps even more interesting though is that new listings are plummeting. New listings in Greater Vancouver fell to 20 year lows for the month of September.

It appears both buyers and sellers don’t like todays prices. Both are refusing to transact at today’s prices. Negotiations have become hostile.

A similar story is playing out in the GTA. Both Toronto home sales and new listings plummeted to 20 year lows in the month of September!

Prices are inching lower but at a much slower pace with sellers pulling inventory off the market. Many sellers are choosing to rent out their properties instead, or planning to try selling again in the spring once market conditions improve. But what is the catalyst for higher prices in the spring? Are sellers betting on a central bank pivot?

According to the Bank of Canada this week, more pain is coming. “Simply put, there is more to be done,” Macklem told the Halifax Chamber of Commerce. Inflation will “not fade away by itself.”

“We think the best chance of getting to that soft landing is to front load those interest rate increases,” Macklem told reporters after the speech.

In other words, another jumbo rate hike of at least 50bps is all but guaranteed at the Banks next meeting on October 26th. That implies a variable rate mortgage north of 5.5%, and a stress test of at least 7.5%.

There’s not much relief on the fixed rate side either. Bond market volatility remains incredibly elevated. Yields on the Canada 5 year bond just hit new highs on the year, after retracing for several months this summer.

So interest rates are still moving higher and sellers are holding out for better prices. What’s rather ironic here is that the more resilient the housing market is, the more reason for the Bank of Canada to continue raising interest rates.

The stronger housing is, the more difficult it will be to get inflation down. The more difficult it is to get inflation down, the longer interest rates remain elevated. Many sellers appear to be betting on another short-lived housing correction that seemingly hinges on a return to falling interest rates.