Canadian real estate prices haven’t fallen much, but the value of the loonie has. BMO Capital Markets warns inflation-adjusted home prices have rolled back almost a decade. In a research note to investors, the bank explains that fundamentals are returning. Weak sales may be less about affordability and more about generational hesitance.
Canadian Real Estate Price Correction Has Been Modest
Any aspiring first-time home buyer will tell you prices are moving lower, just not fast enough. The price of a typical home fell 21% from the record high in 2022, but much of 2020’s low-rate-fueled surge remains. Since the initial correction’s shock, prices have been resistant to further declines. CREA’s latest report shows that a typical home across Canada is just 4% lower than a year prior. A nice discount, but not exactly game-changing for home buyers.
“Canadian home prices continue to drift lower as the market reverts back to income, interest rate and cash flow fundamentals,” explains BMO senior economist Robert Kavcic. He further notes that prices have only fallen 1.4% annualized over the past 3 years, almost a year after the downturn began.
Despite home prices stalling after the correction, there’s been progress. The bank explains that home prices are still up a “modest” 2.2% annualized over the past 5 years, when the correction began.
Inflation Rolled Canadian Home Prices Back Nearly A Decade
Canadian home prices are stagnant in nominal terms, but falling in real terms. “While [real estate prices are] positive, keep in mind that inflation over that period has run at 3.7% annualized, leaving real home prices contracting,” says Kavcic.
Elevated inflation drives borrowing costs higher, but also real prices lower. Canadian real estate’s stagnation has left the real cost of home prices lower. “In fact, in real terms, home prices are now roughly unchanged from where they were 9 years ago,” he says.
Source: BMO Capital Markets; CREA.
Despite this erosion in real terms, home sales remain tepid at the current level. The bank suggests this may have less to do with affordability and more to do with hesitation.
“There is a generation right now realizing that real estate can be a massive wealth creator; but it can also lock in capital and suck up cash flow for prolonged periods. Hence the lack of urgency of new buyers to get into the market right now, and the lack of investor interest,” explains Kavcic.
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