Is Canada headed for an even bigger housing price correction?

One of Canada’s top banks says average home prices could drop as much as 10 percent by early 2024 thanks to a surge in housing supply in Canada’s second and third largest provinces.

TD Canada Bank recently updated its forecast to reflect a much steeper drop than its previous prediction of five percent, citing an upgraded bond yield forecast and a more significant loosening in the B.C. and Ontario real estate markets than it had previously predicted.

“Ontario’s sales-to-new listings ratio has plunged to 39 percent in October from 63 percent in May,” the bank’s economists wrote in the latest forecast. “A sudden surge in supply is largely behind the deterioration in the ratio, abetted by a more prolonged drop in sales.”

The Canadian Real Estate Association (CREA) reported the national sales-to-new listings ratio (SNLR) dropped to 49.5 percent in October – a 10-year low – from an all-time high of 67.9 percent in April. The long-term average for the national SNLR measure is 55.1 percent.

“We’re only in November, but it appears many would-be home buyers have already gone into hibernation,” Larry Cerqua, chair of CREA, said in a media release. “The October numbers also revealed some sellers may be shelving their plans until next spring.”

However, TD’s economists noted that even with a 10 percent decline in home prices, the Canadian housing market would remain significantly above pre-pandemic levels.

“Some perspective is warranted,” the latest forecast warns. “A 10 percent decline in average home prices would still leave them 15 percent higher than pre-pandemic levels.”

TD Canada anticipates that the Bank of Canada will reduce interest rates in the second quarter of the upcoming year, thereby preventing a further decline in home prices. The prediction is grounded in the belief that sustained population growth will continue to bolster demand in the housing market.

“Our expectation that the Bank of Canada will be cutting rates towards the end of the second quarter of next year prevents a steeper decline,” the bank’s latest forecast reads. “In addition, robust population growth cushions the downside potential on prices. Lastly, Ontario’s and B.C.’s experience is not that of Canada, where other provinces have benefited from tighter markets and better affordability. Most importantly, we expect job markets to bend (but not break) under the weight of high borrowing costs, underpinning demand and limiting forced selling.”

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