Reports

The progression in the Composite index last month was the lowest for a month of July in 15 years. This marks a second month of signs that the economic lockdown had an impact on slowing activity in the housing market. It should be noted that the official Teranet-National Bank House Price Index is smoothed using a 3-month moving average and employs land registry data. This means that it currently reflects home price evolution while the sector was still on slow motion. The seasonally adjusted raw index for July is rather showing a 0.9% rebound following two consecutive declines, a development consistent with the strong rebound in home sales happening since April. Does this mean that the housing market will be spared from difficulties in this recession? Not so fast. Pent-up demand accumulated during confinement boosted June and July sales numbers. A look at the 5-month moving average shows that activity on the resale market was rather weak since March. In that sense, we still think that the housing market is facing some challenges. Indeed, households have not yet suffered the consequences of the current economic difficulties. Consumers have benefited from deferred debt payments, and the income assistance programs established by the various levels of government have more than offset labour market losses. The end of those programs and a still healing labour market could mean some headwinds for the housing market at some point.

August 2020

Last month’s advance in the Composite index was the lowest for a month of June since 2004. This adds to other signs already witnessed in May of a slowing of activity on the housing market due to COVID-19. For instance, the number of sales pairs from which June indexes were derived was the lowest for a month of June since 2001. As in May, a low level of sales pairs was recorded in all the 11 metropolitan areas comprised in the Composite index. Also, June marks the second monthly decline in a row of the seasonally adjusted raw Composite index. The raw index declined in June in six of the 11 metropolitan areas. True, According to CREA, overall Canadian home sales returned to a more normal level, and this should be soon reflected in land registries. But question marks still lie ahead. We expect the Canadian unemployment rate to remain elevated for a while. In this context, demand for housing may decrease due to a reduction in immigration and would-be first-time homebuyers not being able to qualify for a mortgage loan. That said, the homeownership rate is low among workers in sectors hardest hit by COVID-19.

July 2020

There are two signs that data from land registries reflect the slowdown in home sales activity that started in the second half of March. The first is the 22% y/y decline in the number of sales pairs from which May indexes were derived. This was the largest y/y decline since April 2013 and a clear break in the upward trend that was taking place earlier. There were declines in sales pairs in all the 11 metropolitan areas. The second sign is the slowdown in the seasonally adjusted raw Composite index, which rose only 0.2% in May after three months of gains topping 0.8%. The raw index declined or was unchanged in five of the eleven constituent metropolitan areas. In our view, declines in home prices lie ahead. The Canadian unemployment rate went from 5.6% in February to 13.7% in May, and is expected to remain elevated at least up to the end of next year. In this context, demand for housing may decrease due to a reduction in immigration and would-be first-time homebuyers not being able to qualify for a mortgage loan. At the opposite, supply may be fuelled by homeowners unable to meet mortgage payments and for that reason will look to sell their home.

June 2020

Housing affordability in Canada’s large urban centres improved in the first quarter of 2020. Although mortgage interest rates remained essentially unchanged from Q4 to 2019, an increase in income was able to offset the rise of home prices for the urban composite. The latter registered a second consecutive 1.5% gain in prices in the quarter. But this is now old news as the economy has entered a recession which could significantly shake the Canadian housing market and therefore affordability. Interest rates are unlikely to provide much relief for homebuyers as they have in previous economic crisis’. Indeed, interest rates were already very low before the crisis, and give zero lower bound for central banks, they have very little room to move lower. The 5-year mortgage rate has declined only 17 basis points from the beginning of the present crisis, which is very little compared to the declines of other recessions. Moreover, incomes should face some headwinds as we expect the unemployment rate to hover near 9% over the coming year with production capacity being destroyed due to the current lockdown. In such a context, we foresee a marked drop in home prices, about 10% nationally, sharper than in any of the country’s last three recessions. Of course, this scenario assumes that the CMHC refrains from raising the minimum down payment as suggested on May 15th. In our vie, such a policy in the context of a recession would amplify the risk of home-price deflation by excluding potential homebuyers.

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The streak of improvements in home affordability in major Canadian urban centers came to
an end after three quarters with a slight deterioration in Q4 2019. While mortgage interest
rates were essentially unchanged from Q3, income growth was unable to keep pace with the
rise in home prices for the urban composite. The later registered its strongest increase in more than 2 years. Among the 10 urban centers covered, only Vancouver and Winnipeg saw income
increasing faster than housing prices during the quarter. Vancouver was the only market
showing an improvement in affordability, the monthly mortgage payment as a percentage of
income registering a fourth consecutive decline, a first since 2008-2009 when the global
economy was mired in a recession. While our national housing affordability composite index
stands on the cusp of its two-decade average, we note significant divergence in affordability
among urban centers. Indeed, despite some ameliorations over the past year, the Vancouver,
Toronto and Hamilton markets are still exhibiting affordability concerns while all other markets are either in-line with their historical norms or even better. The widespread improvement in affordability occurred in 2019 thanks to an 85 basis points decline in mortgage interest rates and one of the smallest increases in home prices among OECD countries (+1.2%, see chart page 13). That said, we doubt that a further improvement in home affordability is possible at this point as we see interest rates levelling off and home prices should accelerate given tight supply in the resale market. Indeed, the national active listings to sales ratio is at its lowest since 2007Q2, a level generally associated with worsening affordability.

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Based on home sales reported in land registries, resale prices rose at the fastest rate for a month of April since 2010. Moreover, if we consider the 11 metropolitan areas included in the Composite index and 14 other metropolitan areas for which a HPI is available, the index increased in 22 of these 25 regions, the highest diffusion of monthly gains in nine months. Of course, given that the Canadian economy entered into a recession following sanitary measures taken in order to prevent the spread of COVID-19, it is not likely that this momentum will persist. The Canadian unemployment rate went from 5.6% in February to 13% in April, and is expected to remain elevated at least up to the end of next year. In this context, demand for housing may decrease due to a reduction in immigration and would-be first-time homebuyers not being able to qualify for a mortgage loan. At the opposite, supply may be fueled by homeowners unable to meet mortgage payments and for that reason will look to sell their home. In other words, a lasting high unemployment rate could mean downward pressure on house prices.

May 2020