Canadian real estate markets are experiencing a slowdown as the impact of higher interest rates is becoming evident nationwide. RBC has issued a warning based on October data that reveals a decline in existing home sales and a simultaneous increase in inventory. This combination has led to a doubling of the pace of price decline for a typical home compared to the previous month. Despite some relief in mortgage rates, the bank anticipates that market weakness will continue to spread in the near future.
The weakening trend in Canadian real estate markets is evident across the country. Existing home sales declined by 5% in October, marking a 12% drop over the past four months. Concurrently, the inventory of homes available for sale is on the rise, contributing to the downward pressure on home prices.
The prices of typical homes have reversed the gains seen in recent months, with a 0.8% decline in October, which is twice the rate of decline compared to the previous month. If this trend continues, it could push unadjusted annual price growth into negative territory.
Robert Hogue, assistant chief economist at RBC, attributes this broad decline in the real estate market to higher interest rates and a lack of affordability. This trend is particularly noticeable in provinces like British Columbia (BC) and Ontario, where home prices are at their highest.
Ontario, which once led the nation’s real estate markets higher, is now witnessing a reversal of that trend due to rising interest rates. Home resales in the province have fallen for the fifth consecutive month in October, reaching the lowest levels since the Great Financial Crisis (excluding the pandemic shutdown period).
Hogue also points out that other regions that initially resisted the national slowdown are starting to show signs of weakening, such as Alberta, where existing home sales dropped by 8.3% in October.
While some provinces have maintained positive annual price growth for now, RBC expects this to change soon. The bank predicts that Canadian real estate markets will continue to soften due to factors like high-interest rates, affordability challenges, and economic uncertainty, especially in high-priced markets in Ontario and BC.
Hogue adds that this trend is likely to persist into the next year. With higher interest costs leading to more sellers entering the market, buyers may gain additional pricing power in the coming months, setting the stage for further price declines in Ontario and BC.
RBC cautions that this weakness in the real estate market could potentially spread to other regions, and a turnaround is not expected until interest rates begin to decrease. The bank does not foresee the first Bank of Canada policy rate cut happening until mid-2024, in line with market expectations of a relatively stable policy rate despite falling bond yields.
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