Canadas second largest bank says average home prices could drop as much as 10 per cent  by early 2024 thanks to a surge in housing supply in two provinces.

A previous forecast from TD Bank had called for average home prices to fall around five per cent from their third quarter level through the early part of next year.

However, the bank updated its forecast this week to reflect a much steeper drop, citing an upgraded bond yield forecast and a greater loosening in the B.C. and Ontario real estate markets  than it had previously predicted.

Ontarios sales-to-new listings ratio has plunged to 39 per cent in October from 63 per cent in May, the banks economists wrote in the latest forecast. A sudden surge in supply is largely behind the deterioration in the ratio, abetted by a more prolonged drop in sales.

The sales-to-new listings ratio (SNLR) represents the number of existing home sales in a given market, divided by the number of new listings entering the market, according to the Canada Mortgage and Housing Corp. (CMHC). The SNLR is used to assess possible overheating or cooling in a housing market. A lower ratio points to a buyers market, while a higher ratio suggests sellers have the advantage.

Last week, the Canadian Real Estate Association (CREA) reported the national SNLR dropped to 49.5 per cent  in October – a 10-year low – from an all-time high of 67.9 per cent in April. The long-term average for the national SNLR measure is 55.1 per cent.

Were only in November, but it appears many would-be home buyers have already gone into hibernation, Larry Cerqua, chair of CREA, said in a media release. The October numbers also revealed some sellers may be shelving their plans until next spring.

According to CREA, there were enough properties on the market at the end of October that it would take 4.1 months to sell them all  at the current pace of sales — a metric known as months of inventory.

This is up from the low of 3.1 months of inventory in May, but is still below the long-term average for Canada, which is nearly five months of inventory.

STILL HIGHER THAN PRE-PANDEMIC LEVELS

Nevertheless, TDs economists said the Canadian housing market would still be well above pre-pandemic levels even with a 10 per cent drop in home prices.

Some perspective is warranted, the latest forecast warns. A 10 per cent decline in average home prices would still leave them 15 per cent higher than pre-pandemic levels.

TD predicts the Bank of Canada will cut interest rates  during the second quarter of next year, preventing home prices from dropping further, and that population growth will sustain demand.

The potential for weaker growth or higher-than-expected interest rates are important downside risks to the outlook, the banks latest forecast reads.

In a scenario where new listings post a small decline through the first half of next year, compared to the modest gain we expect, Canadian average home prices would still fall, but the decline is about one percentage point shallower.