House prices are down, but still not affordable.

Greater Toronto Area prices and sales are down in a meaningful way.

The Greater Toronto Area (GTA) housing market experienced a period of stability on a month-over-month basis in May 2024, with home sales remaining at a low 7,013 transactions. With that being said, “stability” is not really what you want on a monthly basis in the middle of what ought to be a spring market. In a typical year, transactions rise pretty consistently from January until May. When looking at an annualized context, it’s a significant 21.7 per cent decline from the 8,960 sales in May 2023, and so it’s no surprise that OREA CEO Tim Hudak has publicly called for rate cuts. This well-trodden trail was blazed by a choir of Canadian politicians who appear confused about the political autonomy of central banks since rate hikes began.

Hudak’s comments bring attention to something that is painfully apparent in advanced economies with lower homeownership than Canada: unaffordable markets see very little transaction volume. While this is not necessarily a bad thing for consumers of housing, it is certainly a bad thing for the industry that depends on transaction volume to make a living. This is why countries like Canada and the United States have large numbers of realtors per capita, whereas countries like Switzerland and the UK have very little. Much of the transaction volume that professionals do see in these markets is seen in leasing, which has become a growing share of income for real estate professionals in the GTA during this record-low period of sales volume.

It has not b­­een hard to find an acknowledgement of Canada’s crippling housing affordability issue from economists at Canada’s biggest banks – with RBC’s analysis visible below:

“People will start buying houses when they can afford to."

From my lens, in order to see meaningful growth in transaction volume, we need housing to be affordable again. It’s so simple that people call me stupid when I say it, yet it appears to be so easily ignored.

Bloomberg broke down what it would take for Canada to see a retreat from this affordability crisis:

1.    A 33 per cent decrease in house prices; and/or

2.    A 55 per cent increase in incomes; and/or

3.    A 350 basis point decrease in mortgage rates.

The average selling price for homes in the GTA in May 2024 was $1,165,691, marking a 2.5% decrease from May 2023’s average price of $1,195,409. Similarly, the MLS Home Price Index Composite benchmark saw a year-over-year decline of 3.5 per cent. Despite prevailing high interest rates, there was a modest month-over-month uptick in the average selling price on a seasonally adjusted basis from April 2024, indicating slight strength in the bid of buyers in today’s spring market.

With this updated annual decrease in house prices, we have arrived at a juncture where prices continue to do the bulk of the work in restoring affordability. Measured from the peak of the market, house prices are down 20-30 per cent, depending on which metric and market you use. Mortgage rates have only just begun to move down 25 basis points this week, and incomes rising a nominal 2.5 per cent since 2022. Without further material changes in incomes or interest rates, it would not be unreasonable to expect house prices to continue bearing the burden of increased affordability, as fewer and fewer Canadians can afford to buy homes. The Bank of Canada acknowledged this in their press release for the June rate cut – by stating that inflation could be higher […] if house prices in Canada rise faster than expected, or if wage growth remains high relative to productivity. A bull might hope they’re not using GDP per capita as that productivity metric, because in that regard, even stagnate wage growth is going to be high relative to productivity:

Rock and a hard place

The Bank of Canada is a little bit stuck here when it comes to restoring housing affordability, in such that a growth in wages or house prices would decrease their likelihood of further cuts.

Despite the annualized decrease in demand. new listings showed a contrasting trend, increasing by 21.1 per cent year-over-year to reach 18,612. The combination of the increase supply (listings) and decrease in demand (sales) is sending us on an expedited path towards a buyers market, which is typically coupled with downward price discovery. This influx of new listings provided prospective buyers with a larger range of choices and greater negotiating power, leading to a less competitive market environment compared to the previous year. The supply/demand imbalance led to a relatively low sales-to-new-listings ratio. Given supply growth alongside a typical summer decline in buying activity, it would be reasonable to expect a buyer’s market this summer.

^ These charts are from

Alex (@xelan_gta)

for my monthly RARE Report.

While many are optimistic that interest rate cuts will be the beginning of the end for unaffordability and low-volume challenges in Canada’s real estate market, this reality comes at a cost. Much of the listing volume increase we see after rate cuts take place could come a result of financial stress on borrowers, despite their slight relief.

Delinquency rates typically rise after rate cuts take place, for two reasons:

1.    The lagging impact of rate hikes being felt on borrowers; and

2.    The reality that central banks cut rates in response to bad economic data, which leads to more bad data, such as rising unemployment, which constricts household ability to service debt.

This was well visualized by Ben Rabidoux of Edge Realty Analytics below:

More supply, less demand

We’re just starting to see distress materialize and supply pile up in a meaningful way. We’re seeing a record number of active condo listings on the market right now, and a record amount of supply due to close in the next 3 years. There is a material headwind facing the condo market and in the absence of demand from higher incomes or lower rates, only prices can restore affordability.

Dangerous curves ahead

The government will realize this eventually, and it would not be unreasonable to expect they may adapt some policy in order to stimulate the economy. Given the immigration demand curve has proven to be a high-risk political manoeuvre for the current administration. We also know the government is attentive to the role that home equity plays in funding Canada’s “great retirement” in the coming decades:

Given that the government has sort of made it clear that their mandate is to support house prices, there are only 2 notable policy levers they could play with here:

1. Roll Back the B20 stress test:

I don’t think this will happen, but honestly, politicians are looking for an enemy when it comes to interest rates as a function of housing affordability, as I mentioned at the beginning of this post.

So, I’m surprised we haven’t seen more political pressure on Peter Routledge here. Honestly, his decision to stress-test mortgage consumers probably saved Canada’s economy from collapse during the rate-hiking cycle. Routledge is very justifiably proud of his decision, and barring any political pressure, my expectation is that the stress test will survive until his tenure as Superintendent comes to an end. He was appointed Superintendent of Financial Institutions in June 2021, for a seven-year term ending in 2028. I could see the aforementioned political pressure arising. While it seems today all the politicians want to ignore central bank autonomy and demonize the Bank of Canada, it’s grossly out-of-mandate for the Bank of Canada to manage housing values to the upside. If anything, they want to manage it more to the downside as a contributor to inflation, which is their actual mandate. Once they’ve exhausted this avenue and realized its futility, I wouldn’t be surprised if politicians metaphorically

2. Allow foreign investment

This is the easier and more politically expedient decision here. In February, the government proposed a 2-year extension to the foreign investment ban, also known as the Prohibition on the Purchase of Residential Property by Non-Canadians Act.

The CMHC website states that: “On February 4, 2024, the Government of Canada announced its intention to extend the existing ban on foreign ownership of Canadian housing for an additional two years, to January 1, 2027.  For more information, please refer to the news release issued by the Department of Finance Canada.”

“Intention” seems to be the operative word here.

The news release points to the 2023 Fall Economic Statement and Canada’s Housing Plan (which I was impressed by, honestly.)

Here’s where the housing plan states an intention:

In the 2023 Fall Economic statement has no mention of the intention.

In the budget, another proclamation of intention can be found on page 74:

I’m not really well-versed in this policy stuff but extending an existing ban doesn’t sound that complicated, maybe it just happens automatically on January 1st, 2025 because they intend for it to happen.

But also, maybe it doesn’t, due to the absence of some complicated bureaucratic procedure.

Neither would surprise me.