TD doubles forecast for housing price drop amid ‘sudden surge in supply’

Click to play video: 'TD report warns of potential 10% drop in home prices in some markets'
TD report warns of potential 10% drop in home prices in some markets
WATCH - TD report warns of potential 10% drop in home prices in some markets

One of Canada’s major banks is forecasting a steeper drop in home prices amid a “sudden surge” of supply in some real estate markets.

TD Bank updated its forecast Wednesday, calling for a 10 per cent drop in home prices from their third-quarter level through the early part of next year. In September, it pegged that drop at five per cent.

Its economists said there are two reasons for the change: its upgraded bond-yield forecast and a “larger-than-anticipated” loosening in British Columbia and Ontario’s housing markets.

“Ontario’s sales-to-new listings ratio has plunged to 39 per cent in October from 63 per cent in May. A sudden surge in supply is largely behind the deterioration in the ratio, abetted by a more prolonged drop in sales,” they said.

“However, some perspective is warranted. A 10 per cent decline in average home prices would still leave them 15 per cent higher than pre-pandemic levels. 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.”

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Click to play video: 'What can cause home values to drop ?'
What can cause home values to drop ?

TD’s update comes after the Canadian Real Estate Association (CREA) said last week that Canada’s biggest housing markets saw a “sizable decline” in sales in October.

CREA said home sales recorded in October were down 5.6 per cent from the previous month. On a non-seasonally adjusted basis, the national average sale price for a home in October was $656,625. That’s up 1.8 per cent annually and slightly above figures seen in September.

CREA senior economist Shaun Cathcart said that while housing demand is still “extremely high” across the country, October’s data is showing that pressure is likely to be suppressed until spring 2024 “at the earliest.”

“It will really come down to whether the Bank of Canada has to increase interest rates again, or whether by next March it’s simply a matter of how soon we’ll see the Bank make its first cut,” Cathcart said in a Nov. 15 statement.

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He projected that the level of activity seen this past spring, when sales and prices jumped in many markets as the Bank of Canada’s rate cycle was on pause, could be what’s in store six months from now if there are signs the central bank is ready to cut rates.

Click to play video: 'Interest rates ‘may’ be high enough to bring inflation to 2% target, but still assessing: Macklem'
Interest rates ‘may’ be high enough to bring inflation to 2% target, but still assessing: Macklem

Bank of Canada Governor Tiff Macklem said Wednesday the “excess demand” that was fuelling inflation is gone from the economy.

Statistics Canada reported Tuesday the annual pace of inflation slowed sharply to 3.1 per cent in October, down from 3.8 per cent the month earlier and five per cent lower than the 8.1 per cent peak seen in June 2022.

The Bank of Canada has raised its benchmark interest rate rapidly since March 2022 in an attempt to cool the economy and dampen demand for spending — efforts that Macklem said are expected to continue pushing inflation down in the months to come.

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Macklem said despite slowing inflation, higher interest rates are “squeezing” Canadians. But he argued Wednesday that “the payoff will be worth it” when the Bank of Canada achieves price stability and inflation returns to the two per cent target.

Click to play video: 'Canada will officially be in a recession if downward data trends continue'
Canada will officially be in a recession if downward data trends continue

Macklem said interest rates “may now be restrictive enough” to tame price pressures, but reiterated the central bank is prepared to raise rates again if high inflation “persists.”

The central bank has held its policy rate at five per cent in its last two decisions. The Bank of Canada’s final rate decision of the year comes on Dec. 6.

As for when the central bank’s policy rate could start to fall, Macklem said in a question-and-answer session after his speech that the Bank of Canada is watching trends of underlying inflation carefully.

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TD economists said Wednesday they expect job markets to “bend” but not break under the weight of high borrowing costs, underpinning demand and limiting forced selling.

“The potential for weaker growth or higher-than-expected interest rates are important downside risks to the outlook. On the upside, there’s the possibility that the 16 per cent jump in new listings observed in Q3 unwinds by more than what’s built into our forecast,” they said.

“In a scenario where new listings post a small decline through the first half of next year (compared to the modest gain we expect), Canadian average home prices would still fall, but the decline is about one percentage point shallower.”

— with files from Global News’ Craig Lord

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