Jordan Dawes
November 17, 2023
Weekly Market Update
Canada’s real estate market appears to be stalling. Since the pandemic, home prices have surged higher as low mortgage rates helped increase demand while supply remained relatively low. However, cracks are starting to appear in the market as mortgage rates have risen sharply amid aggressive monetary tightening by the Bank of Canada.
- Existing home sales in Canada dropped by 5.6% in October over the previous month, the fourth consecutive monthly decline. A Bloomberg survey showed economists were expecting a 2.0% decline in October.
- October’s decline was the biggest since June 2022 as higher mortgage rates and already elevated prices take a bite out of demand. Tight financial conditions are weighing on many Canadian consumers, hindering their desire to purchase a new home.
- Listings were also down in October, showing some sellers might be waiting amid uncertain market conditions. The Canadian Real Estate Association (CREA) believes many would-be sellers might be waiting on the sidelines until next spring.
- CREA also said the benchmark home price fell by 0.8% in October over September. Much of this decline was driven by lower benchmark prices in Ontario, while benchmark prices in Vancouver slowed but did not decline.
Canada’s real estate market is currently challenged by higher borrowing costs, elevated prices and struggling Canadian households. Despite some periods of weakness, real estate has historically been a good investment for Canadians. Real estate has also served as a hedge against inflation.
What could help Canada’s real estate market too is the recent inflation data south of the border.
The US inflation rate softened in October, reinforcing comments from the US Federal Reserve Board (Fed) that demand is moderating amid tighter monetary policy. The data shows inflationary pressures are coming down but there’s still more room to go, particularly as the Fed seeks inflation around 2%. October’s sharp drop in the US inflation rate could leave the Fed holding steady at its last meeting of the year.
- The US inflation rate was 3.2% year-over-year in October, down from the 3.7% rate in September. A Bloomberg survey showed economists expecting a 3.3% annual rate in October.
- Downward pressure in the US inflation rate came from a drop in energy prices. Gasoline prices dropped by 5.3% year-over-year amid a decline in oil prices. Food and shelter, two critical components of inflation that have weighed heavily on US consumers, moderated in October compared to September.
- Core inflation, which excludes more volatile items such as energy and food, also eased in October. Core inflation was 4.0% year-over-year in October, down from 4.1% in September. Core inflation has eased in seven consecutive months.
The drop in October’s inflation rate suggests the Fed’s aggressive policy tightening since 2022 is helping to slow inflationary pressures. While inflation has come down, it remains above the Fed’s 2% target, which gives way to the possibility of more rate hikes, per several Fed officials. However, October’s inflation reading raised expectations the Fed is close to done.
Despite coming down, we are clearly in an environment in Canada and the US of relatively high inflation and higher borrowing costs that might persist into 2024. This environment could cause some volatility in financial markets, but do not be deterred from continuing to save and invest. In equity markets, the volatility might provide plenty of opportunities in high-quality companies. In fixed income markets, as interest rates have the potential to level off, yields could eventually start to come down, which could benefit bond prices.
Source: CIBC Morning Market Brief