New home price growth in Canada slows after peaking since 1989
New home prices in Canada are rising at one of the fastest rates in history, but they have started to slow. Statistics Canada’s New Housing Price Index (NHPI) (Stat Can) shows huge annual growth in October. Not so obvious, growth fell from the peak in August, which had been the highest since 1989. The level of growth has historically been followed by a pause, where incomes catch up. If it has started its descent from peak growth, this may see weak to negative price growth soon becoming a reality.
New home price growth in Canada is up 12%
The growth in new home prices in Canada printed huge numbers last month. The index rose 0.9% in October and was 11.5% higher than the previous year. This is a very significant and unusual growth that is really difficult to appreciate without context.
New Home Price Growth Has Fallen From Its Multi-Decade High
New home prices rose at one of the fastest rates in Canadian history. Last month’s annual growth is just a little lower than the 12.2% seen in August. It was the highest growth rate of this cycle, and the highest rate since 1989. It is an incredible amount, but as you can see, it is extremely rare that this type of growth is sustained.
Growth of the New Housing Price Index in Canada
The 12-month percentage change in the New Housing Price Index (NHPI) in Canada.
Source: Statistics Canada; Better accommodation.
Historically, this growth rate is followed by a slowdown
To highlight this extraordinary growth, one need only look at the soaring house prices of a few years ago. During the 2017 spike, new home prices only recorded a peak annual growth of 3.9% in April. By April 2018, growth had fallen below 2% and remained at that level until mid-2020.
During this period, there was a demographic boom which had even accelerated. However, the increase in population could not move the needle much higher. It was only when population growth slowed, with a massive injection of credit, that we saw growth return. The injected credit stimulus created more demand than population growth.
Why is this important? Rapid price growth due to supply squeeze, particularly credit-induced, is volatile. Earlier this month, Moody’s’ warned institutional investors that a rapid rise in prices presented a greater chance of a correction. As rates rise, the easy credit that has driven prices up is going to be reduced.