There are signs that Canada’s housing market is about to get hotter.
At least that’s what Capital Economics, a UK-headquartered economic-research firm, is suggesting.
In a recent report, Stephen Brown, Capital Economics’ senior Canadian economist, notes that the country’s sales-to-new listing ratio has returned to 60 percent.
That means that for every 10 homes that are listed, six are sold — and in the past, this level of activity has corresponded with year-over-year price increases of 10 percent.
Ratios over 60 percent generally indicate a seller’s market, where increased competition for properties drives land values up.
“As the ratio has overstated gains in the last year, we doubt house price inflation will accelerate quite that far,” says Brown.
So double-digit price growth doesn’t look like it’s in the cards.
However, Capital Economics forecasts Canadian home prices will begin to increase at an annual rate of between 3 and 5 percent by early next year.
Declining interest rates have helped Canada’s housing market rebound, and there is no indication that this will change any time soon.
Capital Economics says mortgage shoppers were being offered average promotional five-year fixed rates of 2.65 percent in July, compared with 3.43 percent in March.
“That means buyers can afford to pay 19% more than they could in March for a given monthly mortgage payment,” Brown explains.
But the mortgage stress test that was introduced in January 2018 remains a hurdle, and mortgage rates have yet to return to 2017 lows.
For now, Canadian home prices remain muted even as sales activity picks up. According to the Canadian Real Estate Association, the index price of a Canadian home was up 0.2 percent annually in July, while sales surged 12.6 percent.
“While the Bank of Canada will welcome the rebound in home sales to more normal levels, officials are unlikely to want to see house price inflation materially outpacing income growth again. Unless sales rise much further in the coming months, however, we don’t think such concerns will prevent the Bank from cutting interest rates this year,” says Brown.