Canadian house price growth shows sharp deceleration as ‘busy’ spring begins

Real estate price growth in Canada is running out of steam, falling from a record low. Canadian Real Estate Association (CREA) show house prices hit a record high in March. Most of this appears to be momentum, however, as the annual rate has shown a sharp deceleration. Rising interest rates are dampening expectations and we may have passed the growth peak.

Real estate prices in Canada hit a new high

Canadian home prices hit a new high, but the pace was subdued compared to recent moves. The benchmark (“typical”) home reached $874,100 in March, up 1.0% ($9,000) for the month. Prices are now up 24.4% ($185,300) from last year. It would be a great month on its own, but it’s significantly slower than recent performance. Especially in the spring, when price growth generally picks up, not slows.

Benchmark Canadian Residential Real Estate Prices

The composite benchmark price of a house in Canada, in Canadian dollars.

Source: CREA; Live better.

Monthly and annual growth showed signs of moderating last month. March was the smallest increase since August 2021 and looked tiny next to February’s jump to $30,400. Let us recall the context of last August. House price growth had slowed before the election and suddenly reversed course after. Consequence of promises of increased demand and excessive use of the quantitative facility (QE).

As for annual growth, a sharp deceleration in growth should be noted. Annual growth was 26.9% in March, but 29.1% the previous month. The rate is the lowest seen since December, so the deceleration is wasting no time. This is still a very high growth rate, but a 2.2 point deceleration is quick and may be a sign of more moderate growth. The decline is actually so steep that it forms an angle on the chart, which is unusual to say the least.

Short-term indicators show more signs of price moderation

Analysts will often look at annualized growth to compare recent performance. It involves taking a short period of change and projecting it as if it were the whole year. Since recent months are giving fresher data, it acts as a leading indicator. Today we are going to look at the 3-month rate, which is the preferred period by organizations like the Bank of Canada (BoC). You might see a 4 month or 6 month period used elsewhere, but it’s the same concept.

If the 3-month trend spikes, expect the 12-month trend to follow. If it drops suddenly, expect things to slow down. If the 3-month trend line crosses the 12-month trend, the move up or down often happens faster. A short-term trend essentially pushes/hinders the longer-term trend, as older, more stale data moves out of the time frame. Faster moves should follow more extreme gaps between the two indicators.

Canadian Residential Real Estate Price Growth

The 3-month (annualized) and 12-month growth rate of Canadian composite benchmark prices.

Source: CREA; Live better.

The annualized trend shows that short-term growth is falling very quickly. 3-month growth fell to 31% in March, a sharp drop from the 37% seen a month earlier. More importantly, it is unusual for this trend to break down in the spring market. It generally speeds up as it is traditionally the busy season. If it falls below the 12-month trend, it would take a big trend catalyst to drive growth in the other direction.

It’s easy to attribute the growth statement to higher interest rates, but that’s not directly the issue. It usually takes 18-24 months for higher rates to be fully realized in the market. The 0.25 point change in March is also minimal, as the big 0.5 point rate hike didn’t happen until April. Although these have an immediate effect, most are probably psychological. Higher interest rates and inflation can break a speculative mindset very quickly. Much faster than rising interest rates can strangle credit.