If you’ve been waiting for prices to keep falling before you buy, today’s events signalled the beginning of the end of that wait. 

Here’s what happened, and why it matters. The United States CPI (consumer price index) rose 0.4% in October over the reading recorded a month earlier. And compared to a year ago, it was 7.7% higher. Both of those are unacceptably high increases. However, they were lower than markets were predicting, and in the financial world, what people expect compared to what they actually get is what moves the markets.

The market reaction was instant and forceful. Interest rates on government bonds immediately tanked. Stock markets immediately exploded. The US dollar immediately declined. The Canadian dollar immediately spiked higher. All this instant reaction happened because the US rate of inflation was a little less hot than the smart money was betting on.  

What’s this got to do with the housing market, you ask? “Everything” is the short answer. 

Inflation is pernicious. It erodes purchasing power by making everyday goods from gas to groceries more expensive. And it’s destructive because it puts upward pressure on the wages and salaries of people trying to keep up with it, which costs employers more, so they have to charge more for their goods and services, causing more pressure on wages. And so on. 

Central banks like the US Federal Reserve (“The Fed”) and the Bank of Canada (BoC) fight inflation by raising interest rates. Business and consumers live on credit, in the form of mortgages, lines of credit, credit cards and loans. And when interest rates rise, credit not only costs you more, but typically, you can’t get as much of it as you used to be able to, especially when it comes to getting a mortgage. 

In an effort to reign-in post-covid inflation, central banks around the world have been aggressively raising interest rates with unprecedented speed. In Canada, we’ve had 6 interest rate hikes since March. They have resulted in the BOC’s “benchmark rate” moving from 0.25% to 3.75%. That benchmark rate forms the floor upon which mortgage rates are based. These rates have never risen by so much, so fast. This pace is intended to make borrowing money prohibitively expensive, which convinces people sit on their wallets. When people don’t spend and borrow, inflation cools because prices come down.  

It's happening in the US. It’s happening in Canada. And that’s exactly what’s happening in the Ottawa housing market. 

1. Interest Rates, Asking vs Selling Prices

In the last 6 months, the initial listing price of the median home in Ottawa has declined by over 12%, meaning people are listing their places for sale at reduced prices compared to 6 months ago. (“Median” means that half of all places listed came on the market at above the number referenced, and the other half came on below it). In addition, there is a gap of over 20% between the median listing price, and the median selling price of home in Ottawa. 

In short, listing prices are falling, and so are sale prices.   

The first graphic depicts the median listing price of all homes for sale in the Ottawa area over the last 12 months. The most recent data for October, and month-to-date for November, show a continuation of the pattern first observed last March. What the graphic shows is that until March of this year, the trend was for homes to sell ABOVE their listing price. That phenomenon was particularly pronounced in December last year, when the median asking price was $380k (blue bar), but the median selling price (pink bar) was $435k, fully 15% ABOVE the price that sellers were asking for.

That trend ended the month after that Bank of Canada started to hike rates, in March of this past year. While only a 0.25% rate hike, that’s all it took. The next month (April of this past year) the trend reversed itself, and places started to sell for LESS than their asking price. That trend peaked this past summer, when the median selling price for all homes was a whopping 25% LESS than the original asking price. In October, the median sale price was 21% below the median listing price, while so far in November, median sale prices are coming in 17% under median list prices. 

What the graphic also shows is that median listing prices peaked in April and May last spring, at $600k. Since then, listing prices have slowly but steadily eroded. Median list prices so far in November are now 12% below median list prices this spring. People are asking less for their home and when they actually sell it, they’re getting way less to boot!

Not only are prices declining, but the time it takes to actually sell a home is increasing. From barely a week during last winters’ market frenzy, the latest month-to-date data for the Ottawa market indicates that the median length of time to sell (again, half above, half below the number cited) is now just over 1 month. Put another way, it’s a four-fold increase in the number of days on the market from last winter, as the following graphic illustrates.

What does all this mean to buyers and sellers of real estate? 

Taken together, to-days US inflation number was the first, highly anticipated sign that inflation may be breaking. To be sure, todays annualized rate of 7.7% was far above a healthy rate, but it was also well below June’s high of over 9%, so it’s trending in the right direction. But the news today was that the magnitude of the increase was meaningfully below what people had predicted. That was a pleasant surprise, and investors and markets reacted in an extremely significant and positive way. 

They did so because the logical extension of a decline in inflation will be a decline in interest rates. That will lead to a decline in mortgage rates. Markets anticipate events, and as the market begins to sniff out   this sequence, it will lead to an end in the decline in home prices, and the huge gap that exists today between listing and sale prices will begin to narrow. 

This is a process, not an event. It will take time for this sequence to unfold, and the road to get there will likely be bumpy. But investors across all equity and bond markets in North America and Europe got a glimpse of this ultimate destination today and reacted forcefully to it.

And if you’ve been waiting for prices to continue to fall before you buy, today’s events signalled the beginning of the end of that wait. 

In the weeks and months ahead, I’ll send you periodic up-dates on how the market is evolving and will drill down into a little more granular detail as we examine how the trends might vary by building type, price band, neighbourhood or a combination of all three.  

In the meantime, don’t hesitate to reach out if I or any of my colleagues can help you, and don’t hesitate to flip this note around to family, friends, and neighbours. 

I hope you’ve enjoyed the annual explosion of colour that is the Canadian autumn and are stealing yourself for another Canadian winter.  

Bye for now. 

Dave Crapper