The Bank also noted that Q4 GDP growth came in stronger than expected at 1.0% but was well below potential growth, confirming excess supply in the economy.

Employment continues to rise more slowly than population growth. During the press conference, Governor Macklem said it was too early to consider lowering rates as more time is needed to ensure inflation falls towards the 2% target.

The fourth quarter growth was fuelled by higher oil exports and was moderated by a significant decline in business investment. Housing investment declined again in Q4–a sixth decline in the last seven quarters. Despite increased activity in Q4 new residential construction and renovations, it was more than offset by a large drop in home ownership transfer costs, reflecting the weakening resale market across Canada. Single-family units and apartments led the rise in new construction, as all provinces and territories, except Prince Edward Island, post a rise in housing starts.

Investment in non-residential structures fell sharply, as did spending on machinery and equipment, especially on aircraft and other transportation equipment. Even government spending declined.

As the charts below show, monthly mortgage payments relative to after-tax income are far higher in Canada than in the US, even more so given the tax deductibility of mortgage interest and property taxes south of the border. The US economy grew by a whopping 5.2% in the third quarter compared to a decline of 1.1% in Canada.  Therefore, the Bank of Canada will likely cut interest rates sooner and more aggressively than in the US, improving housing affordability.

This time, the release said, “Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year. Exports and inventory adjustment subtracted from GDP growth in the third quarter, while government spending and new home construction provided a boost. The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly. Even so, wages are still rising by 4-5%. Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand.”

At the prior meeting in late October, the Bank said that the labour market remained “on the tight side” but acknowledged today that it was loosening. Indeed, the October Monetary Policy Report suggested that the inflation rate would not hit its 2% target level until late 2025.

Home sales dropped 5.6% month-over-month (m/m) in October–the fourth consecutive monthly decline and the sharpest slowdown since June 2022. Sales fell in 9 of the ten provinces, notably in P.E.I. (-15.3%), Alberta (-8.3%), B.C. (-6.9%), Ontario (-5.5%), and Quebec (-5.1%), while rising 2.2% in New Brunswick.

The actual (not seasonally adjusted) number of transactions in October 2023 was 0.9% above October 2022.

However, we have high hopes for the spring season as long as the Bank of Canada continues its rate pause. Record population growth has increased pent-up demand for housing and fixed mortgage rates have been falling owing to the US-led rally in bond markets.

New Listings

Sellers move to the sidelines as well. Following the September surge in new listings, newly listed homes fell 2.3% m/m in October, the first decline since March.

With sales falling by more than new listings in October, the national sales-to-new listings ratio eased to 49.5% — a 10-year low. The highest level for this measure was 67.9%, recorded in April. The long-term average for this measure is 55.1%.

There were 4.1 months of inventory on a national basis at the end of October 2023, up a full month from its low of 3.1 months in May. That said, it remains below its long-term average of nearly five months of inventory.

The actual (not seasonally adjusted) number of transactions in September 2023 came in 1.9% above September 2022, but that was far less than the growth in the Canadian population over that period.

The CREA updated its forecast for home sales activity and average home prices for the remainder of this year and next. They commented that the national sales-to-new listings ratio has fallen from nearly 70% to 50% in the past five months, slowing the price rally in April and May. The CREA has cut its forecast for sales and prices, reflecting the marked slowdown in Ontario and BC. The expected rebound in activity next year has also been muted as interest rates remain higher for longer than initially expected.

New Listings

The big news in this report was the surge in new listings as sellers finally come off the sidelines. The number of newly listed homes climbed 6.3% m/m in September, posting a 35% cumulative increase from a twenty-year low since March. New listings are trending near average levels now.

With sales continuing to trend lower and new listings posting another sizeable gain in September, the national sales-to-new listings ratio eased to 51.4% compared to 55.7% in August and a recent peak of 67.8% in April. It was the first time that this measure has fallen below its long-term average of 55.2% since January.

There were 3.7 months of inventory nationally at the end of September 2023, up from 3.5 months in August and its recent low of 3.1 months in June. That said, it remains below levels recorded through the second half of 2022 and well below its long-term average of about five months.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) edged down 0.3% m/m in September 2023— the first decline since March.

That said, the slight dip in prices at the national level in September was entirely the result of trends in Ontario. Prices are still rising across other provinces, albeit more slowly than they were.
Incoming data over the next few months will determine whether Ontario is an outlier or just the first province to show the softening price trends expected to play out in at least some other parts of the country, given where interest rates are.

The Aggregate Composite MLS® HPI was up 1.1% y/y. While prices have generally been leveling off in recent months and even dipped nationally and in Ontario in September, year-over-year comparisons will likely continue to rise slightly in the months ahead because of the base effect of declining prices in the second half of last year.

The national sales data were depressed in August by declines in Greater Vancouver and the Fraser Valley, Montreal, Ottawa, Hamilton-Burlington, London and St. Thomas.

New Listings

The number of newly listed homes edged up 0.8% m/m in August, adding to the cumulative gain of more than 24% between March and July. New listings started 2023 at a 20-year low but are now closer to average levels. Recent survey data suggest pent-up supply is coming down the track as many homeowners reported they planned to their home in the next three years.

With sales falling and new listings edging up in August, the sales-to-new listings ratio eased to 56.2% compared to 59% in July and a peak of 67.4% in April. The measure is now closely aligned with its long-term average of 55.2%.

There were 3.4 months of inventory on a national basis at the end of August 2023, up from 3.2 months in July. While the measure is up a bit from its recent low of 3.1 months in May and June, it remains below the second half of 2022 and well below its long-term average of about five months.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) edged up 0.4% on a month-over-month basis in August 2023— only about half as large as the July gain, which was only nearly half as large as the gains recorded in April, May, and June. This leveling off of prices aligns with slowing sales and a rebound in listings.

While prices are stabilizing at the national level, regional differences are re-emerging. Price growth has remained solid in Quebec and the East Coast, followed by British Columbia and the Prairies. Ontario is now a mixed bag, with some of the more significant increases and some of the bigger declines.

As of August 2023, the Aggregate Composite MLS® HPI was up 0.4% y/y. This was the first year-over-year increase since September 2022. Even though prices appear to be leveling out near current levels, year-over-year comparisons will likely continue to rise in the months ahead because of how prices continued to decline through the second half of 2022.

Today’s press release announced, “The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures.” The Q2 slowdown in output reflected a “marked weakening in consumption growth and a decline in housing activity, as well as the impact of wildfires in many regions of the country. Household credit growth slowed as the impact of higher rates restrained spending among a wider range of borrowers. Final domestic demand grew by 1% in the second quarter, supported by government spending and a boost to business investment. The tightness in the labour market has continued to ease gradually. However, wage growth has remained around 4% to 5%.”

Lest we get too comfy with a more dovish stance in monetary policy, the central bank warned that the Governing Council remains resolute in its commitment to restoring price stability.

The good news is that the July inflation data, released today, will likely keep the Bank of Canada on the sidelines as core inflation has finally begun to slow. A host of economic indicators also point to Q2 GDP growth–released September 1–slowing to around 1% following the stronger-than-expected 3.1% growth in the first quarter. Labour market tightening eased in July with the decline in employment, rise in unemployment and continued downtrend in job vacancies. The central bank also welcomes the slowdown in the housing market.

Home sales recorded over Canadian MLS® Systems posted a small 0.7% decline between June and July 2023. Activity has been showing signs of stabilizing since May. While sales increased in July in more than half of all local markets, a decline in the Greater Toronto Area (GTA) tipped the national figure slightly negative. Sales were also down in the Fraser Valley, which, together with the GTA, offset gains in Montreal, Edmonton and Calgary.

New Listings

The number of newly listed homes was up 5.6% monthly in July. Building on gains of 2.8% in April, 7.9% in May, and 5.9% in June, new listings have gone from a 20-year low in March to closer to (but still below) average levels by mid-summer.

With new listings outperforming sales in July, the sales-to-new listings ratio eased to 59.2% compared to 63% in June and a recent peak of 68% in April. That said, the measure remains above the long-term average of 55.2%.

There were 3.2 months of inventory nationally at the end of July 2023, up slightly from 3.1 months in May and June.

While this was the first month-over-month increase since January, this measure is still a full month below where it was at the beginning of 2023 and almost two months below the long-term average for this measure (about five months).

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) climbed 1.1% month-over-month in July 2023—a larger-than-normal increase for a single month but only about half as large as the gains recorded in April, May, and June. This aligns with sales having leveled off as new listings have been recovering.

Despite the smaller gain at the national level, a monthly price increase between June and July was still observed in most local markets, as has been the case since April.

The Aggregate Composite MLS® HPI now sits just 1.5% below year-ago levels, the smallest decline since October 2022. Year-over-year comparisons will likely tip back into positive territory in the months ahead because prices continued to decline through the second half of 2022.

The Bank forecasts GDP growth to average 1.0% through the middle of next year–a soft landing in the economy. “This means the economy moves into modest excess supply in early 2024, and this should relieve price pressures. CPI inflation is forecast to remain about 3% for the next year, before declining gradually to the 2% target in the middle of 2025.” This is about six months later than the Bank expected in April. This means that high-interest rates remain higher for longer.

While Canadian inflation has fallen quickly, much of the downward momentum has come from lower energy prices and base-year effects as large price increases last year fall out of the year-over-year inflation calculation. We are still seeing large price increases in a wide range of goods and services. Our measures of core inflation—which we use to gauge underlying inflationary pressures—have come down, but not as much as we expected.