Fall market sees prospective home buyers sit on sidelines

RBC Economics reports Canada’s resale housing market cooled at the end of 2025 as buyers “play the waiting game,” leaving the MLS Home Price Index down 0.7% over the past four months and 3.7% year‑over‑year. New listings have fallen 4% over the last four months (including a 1.6% drop from October to November), while month‑over‑month sales rose in Edmonton (3.6%), Vancouver (4.6%) and Calgary (0.3%); only Montreal (+5.8%), Edmonton and Ottawa posted year‑over‑year price gains. RBC warns that further declines in supply could draw down excess inventory in Ontario and B.C., potentially rebalancing markets and stabilizing prices, though Ontario and B.C. remain the softest regions and only Toronto currently favors buyers.

Analysis

Market structure: Buyers sitting on the sidelines compress demand, directly hurting transactional revenue streams for MLS-dependent brokerages, homebuilders and closing-fee reliant services while helping cash buyers and long-duration bond holders if rates ease. New listings down ~4% over four months suggests supply-side withholding is starting to offset excess inventory, tilting markets in Ontario and B.C. toward rebalancing rather than freefall — expect continued localized price weakness (Toronto) but stabilization risk elsewhere within 3–9 months.

Risk assessment: Tail risks include a BoC rate cut (or forward guidance easing) that could reflate prices quickly, or a policy loosening on mortgage stress tests that restarts demand — both high-impact, lower-probability within 3–6 months. Short-term (days–weeks) watch for monthly MLS HPI moves >±1% and new listings change >5% which would invalidate short positions; long-term (quarters) the hidden dependency is inventory timing: sellers staying sidelined can create a sudden supply squeeze.

Trade implications: Favor modest duration longs in Canadian bonds (3–9 month horizon) and selective short exposure to housing-leaning equities/ETFs; use defined-risk options to limit drawdowns (3-month put spreads). FX: a weakening CAD is probable if housing drags growth — allocate small directional USD/CAD exposure sized to portfolio volatility.

Contrarian angles: Consensus underestimates the speed of supply-side rebalancing: if new listings continue to fall >4% monthly, prices could stabilize/rebound in 3–6 months, creating a short-squeeze on leveraged homebuilder/REIT shorts. Historical parallels (post-2020 inventory shocks) show sharp rebounds when supply tightens; hedge short trades with call protection and size exposure to trigger-based exits.

Key Decisions for Investors

• Establish a 2–3% portfolio long position in Canadian aggregate bonds (e.g., ZAG.TO or long 10y Canada futures) targeting positive carry and duration gains over 3–9 months; exit if 10y Canada yield rises more than 30bp from entry.
• Put on a 2% notional short on Canadian housing equities via options: buy a 3-month put spread on XRE.TO (buy ~5% OTM put, sell ~15% OTM put) to capture downside if MLS HPI falls another 2–4% over the next 1–3 months; close if new listings decline >5% m/m or HPI rebounds >1% m/m.
• Take a 1–2% long USD/CAD position (via forwards or FX ETF) with a 3–6 month horizon expecting CAD weakness if housing drag persists; set stop-loss at 1.5% adverse move and take-profit at 3–5%.
• Implement a 2% pair trade: long Canadian Apartment REIT (CAR.UN.TO) vs short XRE.TO (net zero cost if possible) to capture relative strength in rental fundamentals over 3–12 months; unwind if vacancy rates rise >1ppt or Montreal/Edmonton price momentum reverses.
• Monitor five specific triggers over the next 30–60 days before scaling: BoC rate guidance, monthly MLS HPI change >±1%, national new listings change >±4% m/m, Ontario/B.C. inventory change >±5%, and BoC mortgage-rule adjustments — increase or reverse positions if two or more triggers breach thresholds.