Reports

FACTS: The Teranet–National Bank Composite National
House Price IndexTM dropped 0.5% in November, a third monthly
decline in a row. The index fell in four of the 11 constituents
cities: Toronto (-1.4% – a fourth consecutive decline in the
largest real estate market in Canada), Hamilton (-1.6%),
Ottawa-Gatineau (-0.8%) and Edmonton (-0.7%). The indexes
were stable in Vancouver and Victoria. They rose in Montreal
(+1.0%), Quebec City (+0.9%), Halifax (+0.8%), Calgary (+0.7%)
and Winnipeg (+0.5%). On a y/y basis, the Composite index
rose 9.2%, a fourth softer reading in a row following the
record gains of 14.2% in both June and July, and the lowest
since June 2016. November’s y/y rise was led by Victoria
(+14.0%), Vancouver (+13.5%), Hamilton (+12.3%) and Toronto
(+10.6%). The 12-month advance was much smaller in
Montreal (+6.7%), Ottawa-Gatineau (+4.9%), Halifax (+2.1%),
Calgary (+1.8%), Quebec City (+1.0%) and Edmonton (+0.2%).
See charts on next page.

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Nov 2017 TNB Commentary

November Housing Starts

FACTS: Housing starts reached 252.2K units in November,
rising 29.5K (13.2%) from the level in October (top chart).
The monthly increase can be explained by a 25.3K (16.9%)
advance for multiple starts in urban areas, which
complemented the smaller rise for singles – the latter grew
4.2K (7.5%) to 60.4K. Rural starts, for their part, edged
slightly down 0.1K (-0.4%) to 16.8K. Starts declined in
British Columbia (-8.5K), Quebec (-5.4K), Saskatchewan (-
1.3K) and New Brunswick (-0.9K) but those were more than
offset by gains in Ontario (+37.9K), Alberta (+4.8K),
Manitoba (+1.5K), Nova Scotia (+1.2K).

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OPINION: The last two monthly declines in the Composite index are mostly due to Toronto (top chart), but there are signs that the downward pressure on prices in that city is fading. For instance, its unsmoothed index (see note on methodology next page) fell 0.7% in October after declining 3.7% in August and 2.1% in September (middle chart). Following the introduction last April of a tax on foreigners’ acquisitions, market conditions (as depicted by the active-listings-to-sales ratio) loosened in Toronto. But they went from extremely tight to balanced (active-listings-to-sales close to its long-term average – bottom chart). Furthermore, market conditions have stabilized over the last few months. Balanced and stable market conditions support the view that downward pressure on home prices is fading in that city. Market conditions evolving from tight to balanced is a positive development for affordability. Unfortunately, this cannot be said of Vancouver, where conditions remained tight despite the implementation in August 2016 of a tax on foreigners’ acquisitions. In the latter city, prices of condos (the most affordable category of dwellings) rose more than 17% over the last 12 months.

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OPINION: Housing starts were better than consensus expectations in October. Following a drop in September, Canadian residential construction increased and continued to perpetuate a level that is higher than demographic needs (estimated to be around 190K). Starts in the Toronto market dropped over 20% after a 34% drop the prior month. A more normal level of the active listings to sales ratio in that city (a measure of the resale market) helps contextualize decays in residential construction (middle chart).

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Affordability worsened for a ninth quarter in a row in Q3, the longest run in three decades. It’s worth noting that the Q3 deterioration – the most acute in 9 quarters – was exacerbated by the impact of higher mortgage rates resulting from Bank of Canada summer rate hikes (top chart). At the national level, more than 70% of the deterioration in affordability was due to higher interest rates; in Toronto, it was 90% (top chart). In Vancouver, affordability fell by the most since 1994 as potential homebuyers were also hit by a surge in home prices. As of Q3, the Toronto and Vancouver markets are now the least affordable since the early 1990’s (middle chart). Given the Bank of Canada’s stated intention to continue the normalization of monetary policy over the coming year, we expect a cumulative increase of about 100 basis points for the 5-year mortgage rates from the trough. Historically, such a change may have had a limited impact on the housing market but this time could be different. Twenty years ago, a 100 basis points increase in mortgage rates would have caused a deterioration of our national affordability measure by 3.5 percentage points. Today, a similar increase has an impact 60% larger given much higher home prices. The Toronto and Vancouver housing markets are particularly more sensitive to rising interest rates compared to other cities (bottom chart). This, combined with more stringent qualifying criteria for uninsured mortgages announced last week by OSFI, means that those markets are poised to experience home price declines in 2018.

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OPINION: September’s decline of the national composite HPI is the largest in seven years (top chart), due to the fall of Toronto’s index. The Toronto’s unsmoothed index (see note on methodology next page), has shrunk in each of the last three months, for a cumulative loss of 7.5% (middle chart). Many might worry about the fact that the last time we saw a string of monthly declines of such magnitude was during the last economic recession. They should not. Market conditions on Toronto’s home resale market went from being very tight at the beginning of the year to balanced, as suggested by the active-listings-to-sales ratio which, at 2.5, stood at its average long-term value in September (bottom chart). The ratio is still very far from its peak level of 6.5 experienced during the last economic recession. Moreover, market conditions appear to have stabilized over the last four months. If that is the case, a large part of the price correction to be seen in the Toronto home resale market might be behind us.

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OPINION: The recent loosening of the Toronto home resale market translated into Toronto’s HPI dropping in August. In fact, Toronto’s unsmoothed index (see note on methodology next page), which had already dropped in July, fell 4.2% in August (top chart). That being said, Toronto active-listings-to-sales ratio, an indicator of market conditions, turned from being very tight early in the year to indicating a balanced market in August (at 2.5, its value was in line with its long-term average – middle chart). This should limit the potential for further price correction in the Queen City. Yet more price declines cannot be ruled out given the expected tightening of qualification rules for uninsured mortgages and interest rate increases. These factors are expected to have the most impact on prices in markets where homes are the most expensive (Toronto and Vancouver). We expect home prices to be more resilient in other markets, such as Montreal which has been hot this summer (bottom chart).