Reports

Changes in housing affordability from Q4 2014 to Q4 2015 show significant divergence among markets. Affordability deteriorated in Vancouver, Toronto, Victoria, and Hamilton and improved in the other six markets. The sharpest deterioration from a year earlier was in Vancouver, where the MPPI rose 3.4 percentage points, with home prices up 11.9% from a year earlier and median income up only 2.6%.

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OPINION: The report confirms that housing markets in oil-dependent regions are reacting to the economic downturn resulting from the collapse of oil prices. In particular, prices declined for a fourth month in a row in Calgary, for a cumulative drop of 4.4%. Among the metropolitan areas covered, only Ottawa-Gatineau has a similar bad sequence with five consecutive declines totaling 4.7%. Compared to Calgary, the labour market has suffered less in Edmonton, and house prices there have declined more moderately, that is, 1.7% over the last three months. The Composite index has nevertheless grown 5.9% over the last twelve months, but only four of the 11 regions covered (Toronto, Hamilton, Vancouver, Victoria) explain that performance, prices having barely increased or even declined in the other regions (middle chart). With population and job growth in these markets continuing to exceed the national average for the foreseeable future, a major price correction is unlikely in these markets.

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Slim Pickings Despite Recent Sell-Off: This time last year, we acknowledged that the outlook for the Canadian housing market had changed dramatically on the back of a 50% decline in oil prices from their 2014 peak. We highlighted the adverse implications for the Alberta market in particular. Over the past 12 months oil prices have slid by another 35%, compounding the deterioration in the economic outlook. We have seen fit to make further downward adjustments to the outlooks for the mortgage finance companies in our coverage universe.

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OPINION: For Canada as a whole, 2015 saw the largest house price increase in four years (top chart), but only four regional markets were the drivers of that performance. At the other end of the spectrum, the collapse in oil prices has translated into house price deflation in Calgary and Edmonton, with the remaining five markets showing little price growth if not declines (middle chart). Even in Vancouver and Toronto, there was a dichotomy in the market, with condos prices up roughly 6% in 2015, while prices for other types of dwellings surged 15.8% in Vancouver and 10.9% in Toronto (bottom chart). Some believe that the story in Vancouver and Toronto is all about speculation and demand from foreigners, and nothing is fundamental. Data tell a different story. Indeed, fundamentals are playing a role, judging from job growth over the last 12 months of no less than 4.9% in Toronto and 4.0% in Vancouver. Looking ahead, deteriorating economic conditions in Canada should translate in softer job creation in the hot markets, while weak resale markets should persist elsewhere. Under these circumstances, we expect a significant deceleration in the national house price index growth rate in 2016.

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