Ontario’s housing market is raising red flags.

The market hasn’t been this loose since the 2008 financial crisis and there is risk the sales-to-new-listings ratio could drop as low as in the 1990s meltdown when prices plunged more than 30 per cent, says a new study from Toronto-Dominion Bank.

This October the province’s sales-to-new-listings ratio dropped to its lowest level since the financial crisis.

The concern is if higher interest rates further dampen demand the ratio will slip to levels not seen since the deep housing market downturn in the late 1980s to mid-1990s, said TD economist Rishi Sondhi.

Sales-to-new-listings ratios measure supply and demand in housing markets and help predict prices. A ratio under 40 per cent means a buyer’s market where new listings exceed sales, between 40 and 60 per cent is a balanced market and over 60 per cent, where demand outstrips supply, is a seller’s market.

During the late 1980s and early 1990s, home prices plunged by 32 per cent across Ontario, falling 38 per cent in the Greater Toronto area.

“Ontario’s ratio approaching where it was during these depths certainly raises our eyebrows and warrants closer attention,” said Sondhi.

What’s remarkable is normally it would take a deep recession to get the ratio to this level, he said.

A comparison of the two downturns offers reasons to believe such an outcome can be avoided, said Sondhi.

On a per capita basis, sales today are already at the lows seen in the 1990s, but listings are about 20 per cent lower than they were then.

The economic backdrop is also better. From March 1990 to May 1992, Canada was in a deep recession, brought on by high interest rates and fiscal belt-tightening, among other forces. Ontario GDP and employment dropped 6 per cent peak to trough.

TD expects Ontario’s economy will stagnate next year but not fall into recession, with only a mild dip in employment.

Interest rates were also more punishing back then. From February 1989 to May of 1990 the Bank of Canada interest rate rose by about 240 basis points from 11.7 per cent to 14.1.

Today many economists think rates have hit their peak at 5 per cent and the central bank will begin cutting by the second quarter of next year.

The major wildcard, Sondhi said, is investor activity. The ’90s downturn was preceded by a surge in housing speculation that inflated a real estate bubble. When the economy spiralled into recession, homebuilders were left with an inventory overhang that pushed prices down further.

High investor activity is present today, accounting for 30 per cent of home purchases nationally in the first quarter, a high in records going back to 2014.

A lack of data makes a direct comparison impossible, Sondhi said, but “anecdotal information is troubling.”

“We do know that higher interest rates have brought difficulties to the pre-construction market during this cycle by making it more tough for buyers to close on properties they’ve previously purchased,” he said.

Even though a downturn of the magnitude of the 1990s is unlikely, Ontario home prices could fall another 10 per cent by mid 2024 as higher borrowing costs sap demand and more supply comes on the market as homeowners buckle under the strain.

“Homeowners will continue to face this pressure through at least 2025/26, when those that took out mortgages at ultra-cheap rates face a notable payment shock,” said Sondhi.

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When interest rates rise, something’s got to give.

Moody’s Analytics examined delinquency rates across different types of loans to determine how Canadians were prioritizing their payments.

Paying the mortgage appears to come first with delinquencies below their historical average and the share of overdue payments only a third of what they were after the financial crisis. Credit card delinquencies are also below average as Canadians cut back on this type of borrowing.

Bottom of the list is auto loan repayments. Over the past three months, delinquency rates have surpassed pre-pandemic levels and deviated further above their historical average than any other credit category, said Moody’s.

This isn’t peanuts either, as higher prices for vehicles and steeper borrowing costs have boosted the size of auto loans.

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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