Have Canadian home prices hit a bottom? Here are some clues

Enter “Canadian home prices” into a Google search and you’ll find endless headlines about real estate imploding.

That, and 13-year highs in mortgage rates, have driven countless homebuyers to the sidelines. And many are now licking their chops, hoping to buy closer to the bottom.

To do that takes market timing. Most experts discourage timing for good reason. Gauging price direction can be a crapshoot.

Take the most widely used metric of prices in Canada, for example, the Canadian Real Estate Association’s average home price. The country’s average price has skidded 18.4 per cent from February’s peak, and likely 20 per cent-plus once July numbers come out midmonth.

But averages are misleading. More on that in a minute.

Buying some time

If you’re a prospective home buyer, you probably want to know when it’s safe to go back in the water.

I’ll give you some clues and a caveat. The caveat is, I’m not a fortune teller and don’t pretend to be a home price timer.

The clues that follow are legit, however, and their turning points will coincide with a bottom in most cases.

Prices in your region

As mentioned above, average home prices can’t be relied on, particularly at the national level.

If you see the average price plummet, you have to dig deeper. Are similar types of homes (four-bedroom two-storeys, for example) selling for less? Or are people simply buying more apartment condos, which drags down the average price?

The latter is a major factor right now as steep mortgage rates slash buying power. Economists call it the “composition effect.”

Average prices are also deceptively high because they’re constantly skewed by high-end sales. A bunch of $3-million-plus home sales can prop up average prices. But when people stop buying $3-million-plus homes, average prices can dive. Again, with mortgages harder to qualify for, we’re seeing this trend now.

Median prices are a far better gauge of true price action but they still suffer from compositional effects, albeit much less than average prices. Problem is, it’s impossible to find median price data nationwide.

CREA doesn’t publish the data owing to restrictions from certain real estate boards. Hopefully this changes some day.

In the meantime, if you’re in Ontario or British Columbia, use a site like HouseSigma for median prices. It even projects media prices well before official data are released.

Since median data are unavailable in most regions, people have to rely on home price indexes (HPIs), which you can get from CREA, Teranet and RPS Real Property Solutions. HPIs compare similar types of homes, which makes price comparisons far more accurate.

CREA’s version is solid because it’s based on sales in the Multiple Listing Service (MLS), even if those sales haven’t closed yet. Hence, it’s as timely an HPI as you can get.

Tip: Check your local real estate board’s HPI because most publish local data one to two weeks before CREA.

HPIs such as CREA’s let you get granular, showing prices of the home type and location you’re shopping for – condos in Regina, for example.

For signs of a price bottom, you want the HPI in your region to at least start going sideways, potentially auguring a reversal upward.

Sales

Home sales lead prices and sales have been plunging thanks to soaring rates and buyer uncertainty. In many cases, sellers are pulling listings because they’re not getting anywhere near their asking price.

What you want to see is home sales at least starting to flatten out. Check your local real estate board as it publishes this data monthly.

Inventories

When homes don’t sell, inventories pile up. As the number of homes for sale builds, people get more desperate and cut their prices. Some pull their home off the market altogether.

Fortunately in most regions, CREA suggests that people aren’t panic listing. But let’s see what happens in the fourth quarter or early next year.

Ideally you want to see inventory growth slow meaningfully, or pull back. Again, you can get this data from real estate boards and CREA.

Unemployment

Most people don’t have to sell, so long as they have a job and can make their payments. Housing capitulation generally requires a surge in job losses and currently, Canada has a record low unemployment rate of 4.9 per cent.

Thing is, our strong job market won’t last forever. If bond market predictions are right, we’re less than 18 months away from recession. By the traditional two quarters of negative GDP measure, the United States is already in one.

To monitor unemployment, check Statistics Canada monthly. It’ll take at least a half-percentage-point jump in unemployment to start driving job-related forced sales and much more than a half-point for a true crash.

Just remember, it can take months for rising unemployment to translate to home selling.

A turn in rates

If you’re a sideline buyer waiting for your big chance, you’ll want to see:

· A signal from the Bank of Canada that it’s done hiking rates – which could happen by next year if our uninvited guest, inflation, decelerates meaningfully.

A continued drop in Canada’s five-year bond yield

The bond market pricing in rate cuts in the next 12 to 18 months

By the time these three things happen, much of the selling driven by rising rates will have ended.

Final point: I speak with lots of liquid real estate investors and most are just waiting to snap up bargains, especially given soaring rents and immigration-fed population growth.

Every serious buyer who is on the sidelines right now is watching these very same clues. If you’re a prospective buyer, you should, too.

And if you misread these indicators and mistime your purchase, it’s okay so long as you have a long-term time horizon. It may take two, five or 10 years, but in the long-run, real estate values ​​always grow.

Rates this week

Despite five-year bond yields tumbling 80 basis points from the June peak, banks are still holding out on lowering their uninsured five-year fixed rates.

Bankers I talk to attribute this to perceived credit risk in the funding markets, illiquidity and volatility (which affect funding and hedging costs) and static competition (banks don’t have to move if other banks aren’t moving).

Meanwhile, the country’s lowest insured five-year fixed rates are down 40 basis points from their 4.84 per cent peak in July.

Lowest nationally available mortgage rates



TERME UNINSURED PROVIDER INSURED PROVIDER
1-year fixed 4.59% Manulife 4.39% True North
2-year fixed 4.84% RBC 4.54% QuestMortgage
3-year fixed 5.09% HSBC 4.54% Marathon
4-year fixed 5.19% Simplii 4.59% QuestMortgage
5-year fixed 5.09% HSBC 4.44% True North
10-year fixed 5.84% HSBC 5.84% HSBC
Variable 4.15% Alterna 3.50% True North
5-year hybrid 4.64% HSBC 4.74% Scotia eHOME
HELOC 4.55% HSBC N/A N/A

Rates are as of Wednesday from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.


Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.

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