Reports

Since the beginning of the pandemic two years ago, household preferences for housing have changed dramatically, pushing demand up and the supply of properties for sale to a historic low. As a result, the Teranet-National Bank HPI jumped by 31.2% between March 2020 and March 2022 and by 18.4% in one year, a record! Vertiginous price increases have been recorded in many cities included in the index over the past two years, including a 65.0% increase in Halifax, 55.4% in Hamilton and 39.8% in Ottawa-Gatineau (left chart). Judging by the current market conditions, characterized by limited supply, and continued strong demand, prices should continue to rise during the strong spring period – especially since many buyers can still get the mortgage rates that they were guaranteed before the recent increases. However, the upward trend in prices is expected to fade in the second half of the year. Indeed, in the face of the worst affordability conditions on record and the sharp rise in mortgage interest rates in recent weeks, we expect demand to be less robust and price increases to be much more modest.

April 2022

Home prices in 2022 continue to come in strong as the Teranet-National Bank^TM HPI saw a seasonally adjusted monthly growth of 1.7% between January and February. This monthly increase now marks twenty consecutive months of rising housing prices. The recent momentum in home price growth was robust. Indeed, looking on a 3-month annualized basis, home prices registered at 20.5% in February, a level not seen since last summer. The current surge in valuations is likely stemming from strong demand in the resale market which has been favourable towards sellers for a while. There is also reason to think that borrowers who had locked in a lower rate are exercising that option in anticipation of higher mortgage interest rates. The widespread rise in home prices lends some credence to that thesis with prices rising in all 11 markets for a successive month. While this current wave may weaken as buyers are increasingly under pressure from tighter monetary policy, high immigration quotas (432K) should allow for a soft landing. That figure could also be significantly increased by Ottawa’s decision to allow a potentially “unlimited” number of Ukrainian refugees. All in all, while we do think the housing market could lose some momentum during 2022, the aforementioned factors may keep demand persistent.

March 2022

Housing affordability in Canada worsened by 2.1 points in Q4’21, marking a fourth consecutive quarterly deterioration. Over the past year, affordability has worsened at the fastest pace in more than 26 years. As a result, it would take 48.6% of income for a representative household to service the mortgage on a representative home in Canada. This level is a bit more than the last cyclical high seen in 2018Q4 and marks the worst affordability since the mid-90’s with Toronto, Hamilton, Ottawa and Halifax showing levels not seen since the start of this century. While home price growth had its fair share in contributing to declining affordability in Q4, the larger driver was rising mortgage interest rates. Our 5-year benchmark mortgage rate used by our affordability metrics rose 28bps in the last quarter of the year which was the largest one quarter change since 2017Q3 when the central bank raised the overnight rate twice in the same quarter. With investors now anticipating a more rapid increase in policy rates, our benchmark rate has increased by another 30 bps in the current quarter for a cumulative 100 bps since the 2020Q4 rate trough. All else being equal, such an increase would have translated into a 10.7% decline in purchasing power. However, homebuyers opted for variable rate mortgages in a record high proportion (53%) in the second half of 2021. By selecting this option instead of the typical 5-year fixed mortgage, mortgage holders increased their purchasing power by 10% in the fourth quarter. But this escape route is about to vanish in the coming months with the Bank of Canada policy rate on the rise (we expect a 125 basis points increase in 12-months).

Q4 2021

The year 2022 is off to a strong start as the Teranet-National Bank^TM HPI saw a seasonally adjusted monthly growth of 1.7% between December and January. This now makes three consecutive months of stronger price increases than the previous month. This larger price increase coincides with renewed robust demand in the resale market. Indeed, with the mortgage rate increases that began in the fall, and those anticipated in 2022, there is reason to believe that some borrowers who obtained advantageous rates rushed to complete their transactions, which stimulated demand further. As a result, home sales have resumed their upward trend over the past five months. Moreover, this strong level of activity is combined with a historically low supply, which is putting additional pressure on prices. Indeed, the number of months of inventory (the proportion of properties listed for sale over the number of sales in a month) is at a record low of only 1.6 months. Under these circumstances, it would not be surprising to see home prices continue to rise in the months to come. However, with the Bank of Canada’s recent change in tone on inflation, the recent increase in mortgage rates and the additional increases anticipated in 2022, the housing market should gradually lose momentum.

February 2022

The Teranet-National Bank HPI^TM has seen record growth in 2021. Canadian house prices rose 15.5% year-over-year, breaking the previous peak reached in 2016, before macroprudential measures were imposed to calm the housing market. Price growth reached an all-time high in four of the eleven cities in the index: Halifax, Hamilton, Montreal and Victoria. Although record highs were not observed in Toronto, Ottawa-Gatineau, Vancouver, Quebec City and Winnipeg, price increases in these areas were very strong on a historical basis. Calgary and Edmonton had a less spectacular 2021 on a relative basis, but still recorded their best gains since 2014. The 2021 year also ended strong in December, as the composite index experienced a seasonally adjusted monthly increase of 1.1%, a stronger increase than the 0.6% increase recorded in November. This greater increase in prices coincides with the stronger pace seen in the resale housing market. Indeed, over the past five months, sales have increased and the inventory of properties for sale has remained very low, explaining the recent acceleration in prices. Given that the inventory of properties for sale is at an all-time low, it would not be surprising to see further increases in home prices in the coming months. However, the recent increase in mortgage rates and the increase we expect in 2022 should eventually dampen this appreciation.

January 2022

Home prices rose by 0.5% in the major urban markets after seasonal adjustments in November, a stronger increase than what we observed in the two previous months. It should be noted that from June to October, price growth moderated coincidentally with a diminishing activity in the resale market. However, over the past three months, sales have increased and the inventory of properties for sale has remained very low, which explains the acceleration in prices observed in November. Given inventory at a record low, it would not be surprising to see further increases in home prices in the coming months. However, the recent rise in mortgage rates and the anticipation of more rate hikes next year should eventually put a brake on appreciations. All in all, price growth over 12 months has moderated to 15.2% for the composite index, which remains very high on a historical basis. No less than 90% of the 32 CMA’s posted increases of more than 10% over the past year, the highest proportion on record, which attests to the widespread nature of the increases in the country.

December 2021