Sales activity is declining, so why are prices still rising?

Home sales may have decelerated in most Canadian markets in May, but prices still rose on a monthly basis because there are fewer new listings on the market, says a new report from RBC Economics.

According to Robert Hogue’s report, the MLS Home Price Index (HPI) increased by 23% year-over-year in Fraser Valley, 19% in Toronto, and 14% in Vancouver.

“We expect intense upward price pressure to persist nationwide in the near term,” said Hogue’s report. “Further moderation in activity will not be sufficient to rebalance markets, especially if it’s caused by a dearth of homes for sale. We’ll also need more sellers to step in. And higher prices could well be the biggest catalyst for that.”

In the Greater Toronto Area, sales declined in May for a consecutive month falling by 9% from April, according to the Toronto Regional Real Estate Board, but they were still above pre-COVID-19 pandemic levels. Moreover, according to RBC figures, new listings declined by 17% month-over-month. Although bidding wars reportedly involve fewer prospective buyers, they remain commonplace in Canada’s largest metropolitan region, keeping sellers firmly planted in drivers’ seats.

“The region’s MLS HPI accelerated to 18.8% year-over-year, the strongest rate of increase since mid-2017. Single-family homes still attract most of the heat (the segment’s MLS HPI was up 25.1% year-over-year). Renewed demand for condo apartments, however, is increasingly driving up prices in that category as well (up 6.6% year-over-year),” said the report.

In Montreal, resales decreased by 7% in May from a month earlier, but new listings also declined, maintaining tight market conditions that favour sellers. Mirroring Toronto, home values increased in Montreal again last month, and compared to May 2020, they were up 30% in all segments of housing and regions of the city, save for condos on the Island of Montreal, which only rose by 14%.

“We expect the tightness in the market to persist in the near term,” said the RBC report.

In the Vancouver area in May, sales declined by 16% month-over-month while new listings dropped by 9% from April, and according to RBC, that moved the sales-to-new-listings ratio nearer to where prices have historically stabilized. However, like Canada’s two largest cities, sellers in Vancouver are calling the shots.

“And this translated into faster price increases,” said the report. The MLS HPI in the Vancouver region rose by 14% in May from a year prior, marking the strongest rise in three years. In the single-family segment, prices rose by 22.8% while condos only increased by 7.9%. Home prices in Calgary rose 10.6% year-over-year in May, the highest in more than six years, but home resales actually dropped by 18% from April. “Demand-supply conditions in fact tightened further due to an even larger drop in new listings and raised the heat on prices.”