Why This Housing Market is Canada’s Real Estate “Soft Spot”

Homebuyers in a number of Ontario cities are maintaining the upper hand as homes are being listed for sale at a much faster rate than properties are selling.

By Josh Sherman | 3 minute read

Recent interest-rate cuts have yet to ignite home sales activity in Ontario, market-watchers say.

While real estate dynamics in Prairies and Canada’s east coast continue to favour sellers, and Vancouver and Montreal show signs of balance, the country’s biggest housing market remains its coolest.

“Ontario remains the soft spot, with buyers’ markets still scattered across various areas of the province,” writes Robert Kavcic, BMO’s Senior Economist and Director of Economics, in a Canadian Housing Monitor report.

The Greater Toronto Area, by far the province’s largest market by sales volume, saw its condo segment enter recessionary territory earlier this year, with investors fleeing amid higher borrowing costs. The trend has persisted into the fall, with condo prices down 7.5% on a year-over-year basis in September. “Toronto continues to see a wave of condo supply saturate the market,” notes BMO’s Kavcic.

Softer market conditions, which could be favourable for homebuyers but not sellers, weren’t limited to condos or Toronto. The BMO report also flags the city of Barrie, the Kawarthas, and the Niagara area as particularly sluggish secondary markets overall. In each of these markets, the sales-to-new listings ratio — which compares the rate of home sales with the pace at which new homes are put on the market — was below 40% in September.

A ratio below 40%  means that for every 10 homes that are newly listed, fewer than four homes sell. Generally, ratios between 40-60% reflect market balance. Anything below this range is considered a buyer’s market and anything above a seller’s.

Kavcic points out that the latest reading in Toronto pegs the sales-to-new listings ratio at 35.5%, or “the lowest level since the 2009 recession.”

Waterloo may be an outlier in Ontario. There, Wahi has observed relatively stronger demand, with roughly half of the region’s neighbourhoods still seeing home prices bid up as of the third quarter. 

Affordability and migration juice housing demand in the Prairies and Atlantic Canada

In Contrast to the mostly sluggish Ontario markets and the balance in B.C. (in Vancouver and Victoria, the sales-to-new-listings ratios were in the 40% range), Calgary, Edmonton, and Winnipeg had sales-to-new listings ratios higher than 70%. “[S]ellers’ markets persist across much of the Prairies, as well as Atlantic Canada, where relative affordability and inward migration flows continue to support demand,” notes Kavcic. 

Stronger demand in areas such as the Praries underscores that “home ownership is still an incredibly high priority for Canadians,” Karen Yolevski, Chief Operating Officer of Royal LePage, tells Wahi. “People are looking at markets where homes are more affordable and basing their decision on where to put down roots based on home prices,” she says.

According to the Canadian Real Estate Association, the benchmark price of a Calgary home was $582,100 in September, compared to $1,068,700 in Toronto and $1,179,700 in Vancouver.

The law of supply and demand keeps Ontario’s housing market cool

Yolevski also agrees with BMO’s assessment of Ontario as a soft spot, a condition that she suggests comes down to the fundamentals of supply and demand. “This is driven by inventory,” she tells Wahi. “The reason why we have softness and buyers markets is because we’ve seen more inventory,” she adds. “We have some inventory to work through; when you have lots of inventory, it generally keeps a lid on prices.”

Demand, meanwhile, has yet to catch up to a glut of inventory that began piling up mid-year. “Sellers came off the sidelines faster than buyers; buyers have been waiting, waiting for more interest rate decreases [and] potentially now waiting for these new mortgage rules to take effect,” she explains.

The new mortgage rules, which are expected to boost demand, include 30-year amortization periods for all first-time and new-build buyers, as well as raising the limit on insurable mortgages to homes priced up to $1.5 million.

The former rule will let homebuyers spread out monthly mortgage payments over a longer period, thus lowering them, while the latter increases the budget for qualified homebuyers with downpayments of less than 20%.

However, these rules don’t come into effect until Dec. 15. “That’s very late in the season, not typically a time when people are rushing to buy homes — right before the holidays,” says Yolevski. 

Although the Bank of Canada has cut the mortgage-influencing overnight rate three times since June, BMO’s Kavcic adds that it hasn’t been enough to change the prevailing regional trends — yet. “We’re moving further down the rate-relief path, but it’s still going to take more to get the market moving again,” he writes.

With the central bank’s next rate announcement scheduled for Oct. 23, it remains to be seen whether one more cut will be enough to turn markets around in Canada’s so-called real estate soft spot.