After haste: The way the housing market is stalling may require the Bank of Canada to step on the brakes sooner than expected

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The numbers are in and, as one economist puts it, April was the most brutal month for the housing market.

Home sales data shows weakening in Canada’s four largest markets, especially Toronto, where prices may have peaked, RBC Economics said.

“All the evidence points to the Bank of Canada’s rate tightening cycle starting to take hold,” wrote RBC economist Carrie Freestone.

The drop in sales and slowing home price growth indicate that a market shift is underway, RBC says.

April sales fell 26% in Toronto from March, 22% in Calgary and 17% in Vancouver. “Except for the early pandemic shock, the decline in home sales in Toronto was the sharpest one-month decline since the market correction in the late 1980s,” Freestone wrote.

Aside from Calgary and Edmonton, home sales in other major Canadian markets have fallen below pre-pandemic levels, Capital Economics said.

Prices are also starting to cool. Prices in Toronto fell 6.4% on a seasonally adjusted basis in April from the previous month, the worst decline since April 2020, when the pandemic effectively froze the market. Prices in Vancouver were up 1%, but that’s half the average pace over the past six months, RBC said.

Another key indicator is sales-to-new-listing ratios, which fell in Toronto, Vancouver and Montreal as fewer Canadians listed their homes, and those who did saw them on the market longer, it said. Freestone. Of the major markets, only Calgary saw the ratio rise higher in the seller’s market area.

“April turned out to be the cruellest month for the housing market, with the recent rise in mortgage rates leading to major declines in sales across the country,” Canadian senior economist Stephen Brown wrote.

For the first time since 2010, nationally available uninsured 5-year fixed interest rates are all above 4%, mortgage analyst Robert McLister writes in his newsletter.

The cheapest is 4.04%, a rate two and a half times the record low of 1.64% just 16 months ago, he said.

McLister cites TD research that estimates that 5-year fixed rates have risen 140 basis points to date, representing a drop in affordability of about 12% for the average home buyer.

Past bouts of rising rates have reduced housing activity by 10-22% in the following year, TD said.

The slump in home sales in April, along with the unexpected drop in hours worked seen in Friday’s jobs data, could weigh on GDP, said Capital, which estimates that the decline in real estate activity alone will add 0.1%. 2% of the month’s gross domestic product could decrease.

A fall in GDP from April is unlikely to bring a pause in the Bank of Canada’s walking cycle, Brown said. “Nevertheless, the plunge in home sales still reinforces our view that the Bank is underestimating the impact that tightening monetary policy will have on the economy will have.”

Capital expects a further decline in home sales and a “significant drop” in residential investment over the coming quarters to push GDP growth into 2023 and cause the bank to end its tightening process earlier than markets expect.

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