Canadian real estate’s slowdown is finally beginning to show up in new home prices. Statistics Canada (Stat Can) published the December update to its New Housing Price Index (NHPI). The data shows prices stalled and annual growth made its ninth consecutive deceleration. However, the biggest takeaway was the release—with the agency forecasting price growth without any real reason.
Canadian New Home Prices Stall, Annual Growth Decelerates
First, let’s look at new house price data. Canadian new home prices stalled after the biggest growth in history. At the national level, home prices didn’t change in December, and were 3.9% higher than last year. Solid growth still, but a big change from the 12.2% annual growth peak in August 2021. The peak was the highest since the late 80s bubble, and unusual by any measure.
Canadian New Housing Price Index Change
Annual growth for Canada’s New Housing Price Index.
Source: Statistics Canada; Better Dwelling.
Higher Rates Are Slowing New Prices As Investors Pull Back
The agency released full year data, also showing the slowdown at a higher level. The NHPI increased 7.7% in 2022, slowing from the 10.3% growth seen a month before. Higher rates and reduced sales led to that predictable outcome. Especially since a significant share of demand was investor-based. Higher rates, reduced leverage, and more competitive capital use typically diverts investors, as the US Federal Reserve recently explained.
On the upside, this should help to cool inflation. The NHPI is a significant contributor to the consumer price index (CPI). Though it’s important to remember, the NHPI is still nearly double the target growth rate of CPI. Cooling growth is not the same as no growth, or a contraction.
StatCan Slips In A Forecast For Higher Prices Without Much Reason
StatCan expects the NHPI will continue to show new home prices falling in the first half of 2023. It attributes this to falling lumber prices, and rising rates—but doesn’t elaborate. They’re possibly suggesting that falling lumber prices will improve costs for developers. In theory, this might help them build at lower prices.
The agency also made an unusual move—it forecast that prices will rise soon. “As mortgage rates stabilize and uncertainty in the market calms, housing demand and growth in prices should edge up in the latter half of 2023,” reads the Stat Can note release.
Indexes tend to lag, so expectations of price growth falling in the short-term are common. A forecast reversal is different though, it requires a solid reason. It’s logical to assume mortgage rates will rise and stabilize, then uncertainty will subside. Those are also forecasts though, that also require reasoning.
Compounding the issue with this tiny but reckless statement, is a lack of regulatory consideration. By the second half of the year, investor mortgages will have increased risk weighting. Dollars to doughnuts, that wasn’t considered in this forecast suggestion.
A lot of assumptions are crammed into that one statement, which in itself appears designed to influence the market. It’s reckless, at best, for a national statistics agency. They might as well have just said, “it’s going up because it always does. Too da moon.”
All of this isn’t to say prices won’t rise in the second half of 2023. The argument just requires a little more reasoning, especially since it conflicts with every other forecast. Historically, home prices stall after a bubble, allowing affordability to improve. Virtually every professional forecast, from Oxford Econ to RBC, has called this circumstance. Heck, that’s even the outlook from the real estate industry.
