Real estate corrections likely to last years, not months, as prices keep sliding
Despite some optimism in the industry over a modest rise in sales last month, BMO analysts warn that key market fundamentals remain weak and any real estate correction is likely to play out over several years, not months.
Seasonally adjusted data showed home sales climbing 3.5% in May. But with new listings also rising by 3.1%, the sales-to-new listings ratio, an indicator of market demand, barely improved from its already soft levels.
“So, unsurprisingly, the key sales/listings ratio barely improved from soft levels. And that suggests pricing will remain sluggish,” said BMO chief economist Douglas Porter.
While the Canadian Real Estate Association (CREA), has noted that price declines are slowing and suggested a turnaround might be near, BMO remains cautious. Porter pointed out that the seasonally adjusted gain was offset by the fact that, in unadjusted terms, sales in May were 14% lower than the same month a year ago.
“CREA made a point that the decline in prices may be ebbing. That may be correct, but the reality is that they are still ebbing,” he said.
Porter added that Canadian home prices have now fallen for five consecutive months, are down over 3% from last year, and sit 17.5% below the record high set three years ago. He cautioned against reading too much into a single month’s sales improvement, especially given the current balance between supply and demand.
“It takes a big leap of faith to counter that with a single month’s increase in home sales, and smaller price drops,” Porter said.
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Looking at history, BMO’s research suggests real estate corrections in Canada typically last much longer than a few months. Past downturns have ranged from two to 15 years, depending on their severity. Notably, Porter said Ontario’s real estate correction in the 1980s lasted six years from peak to trough—a scenario that may be instructive, especially considering current affordability remains historically stretched.
“At that time [in 2022], we opined that bear markets in Canadian housing are measured in years, not months. The market balance measures agree,” Porter warned.
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