Flushed Down the Toilet

Steve Saretsky -

As per Stats Canada, activity at the offices of real estate agents and brokers dropped 15.0% in April, the largest contraction since April 2020. That was in April, so you can only imagine how the data will look in the coming months. Recent sales figures in Canada’s two largest major metros suggest this bear market is just getting started.

Greater Toronto Area home sales just recorded a 20 year low in home sales in June, the second consecutive month now. The decline in sales activity is rather widespread. Here’s how it looks from a year-over-year perspective in June:

York -52%
Peel -52%
Toronto -43%
Durham -34%

Prices in the suburbs are off in some cases by 15-20% from peak valuations in February. It’s been a sharp move alongside the quickest pace of increase in bond yields in recent history.

While things are certainly less dire here in Vancouver, the market has entered a rather significant cooling. Greater Vancouver home sales were off 34% from last June, the fourth slowest June over the past twenty years. In the Fraser Valley it was the slowest June in over twenty years, pretty remarkable when you consider how much the valley has grown from a population and housing supply perspective over the past several decades. Here’s a further breakdown of year-over-year home sales declines.

Surrey -57%
Abbotsford -54%
Langley -42%
Vancouver -33%

When sales activity dries up to twenty year lows it doesn’t take a genius to figure out what comes next, sure prices come down, but also new housing supply gets flushed down the toilet. As per Jeremiah Shamess, a respected commercial broker in the GTA, “45 projects in the GTA have now been cancelled or “shelved”. (residential real estate condo and rental) year to date.”

Funny enough, CMHC released a report a few weeks ago proclaiming it intends to “restore affordability by 2030.” To do that, it’s targeting affordability levels from 2004 which means we would have to flood the housing market with new supply. Per CMHC we would need an additional 3.5 million housing units by 2030—including rentals—on top of the 2.3 million that’s already expected. If we can miraculously build what CMHC is proposing they believe the average home price will fall by 30% in BC and Ontario by the year 2030. When was the last time a developer willingly decided to launch a whole bunch of new supply into a market with falling prices? Developing Real Estate is a business, not a charity, as we are seeing now.

Is CMHC planning to finance all of these additional 3.5 million units? Because if not it’s going to be hard to convince private investors and banks to supply financing into a market where policy makers are telling you prices will be lower upon completion.

A subtle reminder the way policy makers thing housing works and the way it actually works are two very different things. Navigate accordingly my friends.

Three Things I’m Watching:

1. Fraser Valley Home Sales fall more to more than 20 year low in June. (Source: REBGV, Steve Saretsky)

2. Months of Inventory for sale in the GTA climbs to 2.5, still low on a relative basis. (Source: Daniel Foch)

3. Money markets are now pricing in 75bps of rate cuts from the US Fed in 2023. (Source: Jens Nordvig)

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The Saretsky Report. December 2022