News and Economic Reports

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.

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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.

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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.

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OPINION: On a 12-month basis, national house prices were growing in January at their fastest post-recession pace (top chart). With prices in Vancouver having declined a cumulative 2.5% over the last four months, the strength at the national level really reflects Toronto, nearby Hamilton and Victoria (top chart). Incidentally, those are the three sole markets where house prices, together with the Composite Index, are at a record level (middle table). In the eight other metropolitan markets covered, house prices have some way to go just to come back to their previous peak. House prices in Toronto currently grow at the highest 12-month growth rate since the inception of the index. This is mostly due to dwellings other than condos (middle chart), where supply is notoriously tight. Given that Toronto is a relatively expansive market, house price growth is weighing on affordability for first time home buyers. This, together with the new rules on qualification for an insured mortgage, should sooner or later take steam out of that market.

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OPINION: National house price inflation has shed some momentum in recent months as Vancouver continues to deflate. Canada’s priciest city experienced its third consecutive monthly decline, and more is in store. The price drop so far was mostly concentrated in dwellings other than condos. This is consistent with house sales decline (since their February peak) mostly concentrated in detached dwellings (top chart). In contrast, according to Toronto Real Estate Board, existing home sales reached another record in 2016, while the market faced a very tight supply (middle chart). We have yet to see it, but sooner or later, low affordability and the new ruling regarding the qualification for an insured mortgage will take some steam out of demand and prices. In the meantime, Toronto, Hamilton and Victoria are the three metropolitan regions pulling up the Composite index growth month after month. Apart from Vancouver and these three regions, house prices have been flat over the last six months (bottom chart).

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OPINION: In Vancouver, prices declined in November for a second month in a row, for a cumulative drop of 1.9%, concentrated in dwellings other than condos. This is consistent with the fact that the decline in house sales since their peak last February started in detached dwellings, and is so far deeper in that category (top chart). Due to measures imposed by government (qualification for an insured mortgage, 15% tax on foreigners’ acquisitions, etc.), house prices still have downside in Vancouver. In contrast, sales continued to rise in Toronto, reaching record levels whether in the apartment category or for other types of dwellings (middle chart). We have yet to see a slowdown in response to the new ruling regarding the qualification for an insured mortgage. Toronto, Hamilton and Victoria are the three metropolitan regions pulling the Composite index up month after month. Apart from Vancouver and these three regions, house prices have risen minimally over the last twelve months or have declined.

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OPINION: In Vancouver, October saw the first monthly house price decline in 22 months. The drop was concentrated in dwellings other than condos, which includes detached homes, the category where sales declined the most since their peak in last February (top chart). Sales should continue to decline in Vancouver due to the new rulings (qualification for an insured mortgage, 15% tax on foreigners’ acquisitions, etc.). We expect home prices to decline 10% overall (20% for detached dwellings) over the next twelve months. In Toronto, prices continued to climb at a fast clip in October (y/y price change of 17.4% is a record for the Queen City), as sales continued to break previous records (middle chart). But we expect activity there to slow following the new ruling on qualification for an insured mortgage. However, we think that the house price decline that will result will not be as large as in Vancouver, given the historically low supply on the home resale market, as depicted by the number of dwellings listed for sale, whether for condo apartments or other types of dwellings.

OPINION: In Vancouver, after seven large monthly house price increases in a row, prices were virtually flat in September (top chart). This is consistent with the recent loosening in the home resale market, as sales dropped each month since their record level last February for a cumulative decline of 44% (middle chart). Prices in Vancouver have not fell so far because market conditions have just started to loosen from the tightest conditions on records. We see home price deflation starting soon (10% expected over twelve months). Toronto is now the red hot market. Home sales broke records in each of the last three months. But the historically low supply (in terms of the number of homes listed for sale) is also contributing to market conditions that are the tightest on records (bottom chart). With such a combination of high demand and low supply, monthly house price growth surged to 2.9% on average over the last four months. While the latest measure (maximum debt-service-to-income ratio for insured 5-year fixed-rate mortgage tested against posted mortgage rate) might reduce demand, the low supply still argues against a significant price decline in the Queen City.

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OPINION: In August, the dichotomy in the Canadian home resale market continued, with large gains in the four metropolitan areas (Vancouver, Toronto, Victoria and Hamilton) that have been driving the national index recently. Apart from these four regions, prices have overall decreased over the last 12 months (top chart). That being said, for the first time in seven months, the monthly price increase in Vancouver was below 2%. Market conditions, although still tight, have eased in that city with the decrease in home sales since their peak last February. That sets the stage for a moderate price correction in Vancouver. In contrast, due to a combination of high sales and shrinking supply, market conditions are the tightest in Toronto since at least 14 years, with the number of dwellings listed for sale representing only 1.1 month of sales (middle chart). As a result, house prices growth in Toronto has accelerated to a monthly average of 3.1% over the last three months. On a year-over-year basis, price increases in these two metropolitan areas have accelerated for condos as well as for other types of dwellings (bottom chart).

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