In a surprising turn of events, the Canadian housing market is experiencing a shortage of new home listings, with homeowners showing reluctance to sell their properties. This has led to a surge in home prices, leaving potential buyers facing limited options and entering bidding wars. While there may be multiple factors at play, one significant reason behind this trend could be the higher interest rates in the market today. Could it be that people who locked in ultra-low rates in the past 3 years don’t want to sell and upgrade because they will face higher interest rates on a more expensive home?

A Shift in Market Dynamics:

Historically, during the spring season, new home listings in Canada would typically outpace home sales. However, this year has seen a reversal of this trend, with a scarcity of new listings compared to buyer demand. To understand the underlying reasons, analyzing data from major Canadian markets such as Toronto, Montreal, Calgary, and Vancouver provides valuable insights.

The Influence of the Sales-to-New-Listings Ratio:

The sales-to-new-listings ratio is a key indicator of market conditions, with a ratio of 0.4 to 0.6 signalling a balanced market. Interestingly, the S/NL ratio in the Canadian housing market has steadily increased throughout 2023, reaching 0.72 in April. This ratio indicates a market favouring sellers, giving them the upper hand in negotiations. Examining specific regional markets further supports this trend.

RBC Economics recently released this graphic showing each city and its respective ratio:

Toronto, Montreal, and Vancouver:

In Toronto, the sales-to-new listing ratio has steadily risen from 0.40 in January to 0.66 in April, deviating from the historical trend. Similarly, Montreal experienced a growth in the S/NL ratio from 0.48 in January to 0.64 in April. Calgary and Vancouver witnessed a steady increase as well, reaching 0.94 and 0.69, respectively. These rising ratios indicate a tightening market and increased competition among buyers.

Calgary and Edmonton:

Calgary leads the pack with the highest sales-to-new listing ratio! A 0.96 ratio means that nearly every home that is listed will sell. Only those that present poorly or are asking for too much money are left behind, and those that do sell are often sold with multiple offers and bidding wars.

Edmonton remains the last major city in Canada with a balanced market at 0.58 but even it is pushing the limit and will likely soon be a sellers market.

The Effect on Home Prices:

The surge in the sales-to-new listing ratio and the ensuing advantage for sellers has contributed to an upward trajectory in home prices across Canada. After a decline of approximately 20% in 2022, the average resale home price has rebounded in 2023, reaching $716,000 in April. This price appreciation has been observed in major markets such as Toronto, Montreal, Calgary, and Vancouver.

The Role of Rising Interest Rates:

One significant factor behind the limited supply of new home listings could be the higher mortgage rates today. After years of historically low rates, interest rates began to rise noticeably in early 2022. A typical 5-year fixed rate rose to over 5% late in 2022 and today 5-year fixed rates are still sitting in the mid 4% range depending on whether or not there is mortgage insurance (CMHC) in place.

These higher mortgage rates have also reduced the number of potential homebuyers who qualify for mortgages which have softened the impact on prices from lower inventory. However, homeowners who secured fixed-rate mortgages before the rate hikes now enjoy significantly lower mortgage payments compared to those seeking mortgages at present rates. As a result, the incentive to sell and enter into a new mortgage with higher rates is diminished, leading to a lack of new listings.

Future Outlook and Duration of the Trend:

The duration of this trend depends on the prevalence of fixed-rate mortgages issued in the years prior to 2022. Traditionally, fixed-rate mortgages account for approximately 50% of all mortgages. Recent data from the Canada Mortgage and Housing Corporation (CMHC) indicates that the popularity of fixed-rate mortgages has increased, comprising over half of all new mortgages in 2022.

Given that a significant portion of homeowners hold pre-2022 fixed-rate mortgages, selling their homes in the current environment of high mortgage rates appears unappealing. As long as mortgage rates remain at elevated levels, the shortage of new home listings is likely to persist. This trend may continue until the majority of existing fixed-rate mortgages expire, barring any major economic downturns.

Conclusion:

The shortage of new home listings in the Canadian housing market can be attributed, at least in part, to the anticipation of higher interest rates. The rising sales-to-new-listings ratio and the advantage sellers currently enjoy have driven home prices upward. Homeowners with pre-2022 fixed-rate mortgages find it less attractive to sell and acquire new mortgages at higher rates. As a result, the limited supply of new listings is likely to persist throughout 2023, creating challenges for potential buyers and shaping the dynamics of the Canadian housing market in the coming months.