News and Economic Reports

OPINION: Without Vancouver, the Composite Index would have declined in March and in 5 of the 6 preceding months (top chart). Speaking of Vancouver, inferring from Real Estate Board of Greater Vancouver data, seasonally adjusted home sales have declined markedly over the last two months and the listings-to-sales ratio, while still in the sellers’ market territory, moved close to the balanced market boundary (middle chart). This should translate into moderate increases in Vancouver’s Index over the next few months. Apart from Vancouver and Victoria, March indices were below their recent peak in all regions, but the decline was the most obvious in Toronto (-7.3% since last July). This drop was likely triggered by Ontario’s implementation of the 15% Non-
Resident Speculation Tax followed by stricter rules for qualification for a mortgage (B20) and a rise in mortgage rates. As a result, Toronto monthly seasonally adjusted home sales, which had averaged more than 9,000 units over the previous 24 months, fell to less than 7,000 units on average since last May (bottom chart). Following this change in home sales pace, Toronto home resale market turned from very tight to balanced. With the two most important Canadian markets now in balanced territory or nearing it, a soft landing is the most likely outcome for the Canadian residential market.

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Mar 2018_EN

OPINION: The Composite Index relapsed in February, having lost ground in four of the last six months, for a cumulative drop of 1.9%. Moreover, over that period, indices declined in seven metropolitan regions out of 10. Excluding Vancouver, the Composite Index would have declined or stayed put in each of the last six months. Speaking of Vancouver, we estimate that home sales declined markedly in February. Therefore home price pressures may fade out in that area over the next few months, even if for the moment the home resale market remains tight. For Toronto, home sales declined in January and February after a rush in Q4. In February, we estimate that sales were at their lowest seasonally adjusted level since July 2010, with the active-listings-to-sales ratio indicating a 3- month supply, the highest since November 2012 and comfortably in the balanced territory. It therefore seems that the new stricter bylaws on qualification for uninsured mortgages together with increased interest rates are taking a bite at least in the two most unaffordable large markets in Canada.

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Feb 2018 TNB Monthly Commentary

OPINION: Just like it did the prior month, Vancouver drove the Composite index in January – without Vancouver, the Composite index would have retreated for a fifth month in a row (top chart). On a y/y basis, Vancouver’s index for condos surged 23.0%, while the index for other types of dwellings rose 13.5%. The fact is that Vancouver’s home resale market remained tight even after the introduction of a tax on acquisitions by foreigners (middle chart). The same cannot be said of Toronto, where the market turned from tight to balanced after the introduction of a similar tax last April. Toronto’s index was nevertheless up in January for the first time in six months, after the unsmoothed index (see note on methodology on next page) rose for a third month in a row (bottom chart). This firming of home prices in Toronto might reflect a rush to buy with pre-approved mortgages granted before more stringent rules on qualification for an uninsured mortgages were applied starting January 1st. With further increases in mortgage rates still to come (according to CMHC, posted 5y rates were at 4.14% in January against a low of 3.59% last May), it is premature to conclude that home prices have definitely turned the corner in Toronto.

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OPINION: Without Vancouver, the Composite index would have declined for a fourth month in a row (top chart). The strength of Vancouver’s index is consistent with continued tight home resale market conditions. Toronto’s index declined for a fifth consecutive month, but the unsmoothed index (see note on methodology on next page) rose for a second month in a row (middle chart). Unless the unsmoothed index relapses in January, the sequence of declines in the smoothed index should then be interrupted. However this improvement is likely to prove temporary, as it might have resulted from buyers rushing to avoid the new bylaws on qualification for an uninsured mortgage (implemented in January 2018). This view is supported by the increase in Toronto home sales in November and December compared to previous months (bottom chart). Therefore, a resumption of the downward price trend early this year cannot be excluded.

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201712 TNB monthly commentary

OPINION: Housing starts declined sharply in the last month of 2017 but still managed to beat consensus expectations (211K). A retracement was always in the cards after the unsustainable figure posted in November (251.7K). A good chunk of the decline in December stemmed from an expected fall in multi-unit starts in Ontario (-34.0K) after the latter reached an all-time high in the previous month. Excluding that category, housing starts countrywide were roughly flat month on month. Looking at quarterly data, starts advanced an annualized 13.5% in the fourth quarter, following a +35.6% print in Q3. Despite that jump, it is hard to know whether or not residential construction contributed to economic growth in Q4. True, quarterly data showed a marked increase in multiple starts (+35.8% annualized), but ground-breakings for single units, whose per-unit contribution to GDP is greater, slumped 28.6% in annualized terms. One thing is for sure: 2017 has truly been a banner year for residential construction in the country, with starts totaling 220.5K, the best figure in ten years. Such a performance is unlikely to be repeated in 2018. Indeed, with the implementation of the new B-20 guidelines for mortgage lending, and considering that the Bank of Canada

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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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