Reports

Montréal, June 13, 2017 – Teranet and National Bank are pleased to announce the expansion of the Teranet – National Bank House Price Index^TM (“HPI”) by fifteen additional census metropolitan areas (CMA’s) in British Columbia, Ontario, and Newfoundland and Labrador. The new CMA indices will provide greater and more granular insights into house price changes across Canada.

Canadian CPI inflation continues to surprise on the downside despite robust GDP growth, low unemployment, surging home prices, and a depreciating currency. What’s helping keep inflation down? Shelter costs! This heavyweight component of the CPI (27% of the index) is currently growing an anemic 2.2% annually compared to a more robust 2.7% for all other services (a two-year high by the way). As today’s Hot Charts show, the price of shelter in Canada is only up a cumulative 5.7% since 2014 compared to 8.2% for all other services (that’s a sizeable difference of 44%). In order to understand the divergence, we dug a little deeper and found that the new home price index (NHPI) for Vancouver that is used in the CPI calculation is essentially unchanged since 2008 for both its house and land components. As a result, the Homeowner’s Replacement Cost component of the CPI (20% of shelter costs) is no higher in British Columbia than it was in… 2005! Note that the NHPI is also used for the calculation of the Mortgage Interest Cost component of the CPI (12% of Shelter costs) which, incidentally, remains stuck at a decade low. We are also baffled by the reported cumulative increase of only 37% for the Toronto NHPI since 2008 (vs. 118% according to resale market data). Also helping keep inflation in check, the Rent component of the CPI (22% of shelter costs) shows rent inflation averaging near a record low of 1% in Toronto, Montreal and Vancouver. Bottom-line: Shelter Cost inflation reported in the Canadian CPI report is eerily low.

Read Research Report

OPINION: The strength of 12-month home price growth at the national level is mostly explained by three markets: Toronto, Hamilton and Victoria (top chart). That being said, if we consider markets not currently covered by the Teranet-National Bank home price index, outside Toronto and Hamilton we find many markets in Ontario with double-digit house price inflation. No wonder why the Non-Resident Speculation Tax introduced in April by the Ontario government applies not only to Toronto and Hamilton, but also to the Greater Golden Horseshoe (middle table). The effect of that tax on homes sales and home price growth will be assessed over the next few months. But even if this measure curbs speculation, it should not bring home price growth to a halt due to strong fundamentals such as jobs creation, immigrants from other countries and lately a net flow of migrants from other provinces. Low interest rates also contribute to the housing boom (bottom chart).

OPINION: The strength of 12-month home price growth at the national level is mostly explained by four markets: Toronto, Hamilton, Victoria and Vancouver (top chart). Toronto has garnered media attention in light of the house price surge. While large price gains in that city were isolated earlier to single family homes, that’s not the case anymore ─ condo prices are up a stunning 17% (middle chart). Shut out of the unaffordable single family house market, many buyers are now heading towards apartments, boosting the latter’s prices as a result. Regardless, Toronto’s almost 25% year-on-year house price gains cannot be fully explained by increases in employment and household formation. Outside of Toronto, home prices are also rising in several cities. Indeed, indexes based on the same Teranet-National Bank methodology were calculated for 15 cities not currently covered by the Composite. We found double-digit home price inflation in 10 of them. Together with the metropolitan areas covered by the Composite, it means that 58% of the 26 markets surveyed experienced double-digit home price inflation. This record proportion is very similar to that observed in the United States in 2005 at the peak of the market (bottom chart). That may get government to impose additional measures to put the housing market on a more sustainable footing. The Bank of Canada could also help address the problem by ditching its dovish rhetoric and signal tighter monetary policy ahead to reflect improving economic data but also mounting risks to financial stability.

Read Research Report

OPINION: The strength of 12-month home price growth at the national level is mostly explained by three markets: Toronto, Hamilton and Victoria (top chart). The Toronto market is especially worrisome. In a city where apartments account for only 26% of home sales, affordability of other types of dwellings has become an acute problem (middle chart). For various reasons, supply (number of listings) on the home resale market is at an historical low, and this surely contributed to 12-month home price growth exceeding 20% over the last two months for dwellings other than condos. Even in that pricy environment, demand for dwellings other than apartments is at a historically high level (bottom chart). In order to accurately assess the Canadian home resale market, it is essential to recognize the dichotomy between markets like Toronto, Hamilton and Victoria, where price growth is in the double digits, and other markets where the progression of home prices has been much more moderate, if not negative.

Read Research Report