CANADIAN REGIONAL HOUSING MARKET OUTLOOK (TD Economics)
Highlights
• Since our last forecast in June, Canadian housing markets have been more resilient than we had expected, with Toronto, Vancouver, Calgary and Edmonton leading the way.
• We don’t expect the recent upward momentum to carry forward into 2014. Some of the strength reflects buyers rushing into the market to beat out recent interest rate increases, which will result in a payback later this year.
• Overall, we anticipate relatively stable market conditions in 2014. Further interest rate increases are likely to be modest, while economic growth will continue at a moderate clip. Prospects for higher short-term interest rates later next year are likely to lead to a more pronounced cooling in 2015.
• In this report, we feature differences in affordability across Canada’s major urban markets.
• Since our last forecast in June, Canadian housing markets have been more resilient than we had expected, with Toronto, Vancouver, Calgary and Edmonton leading the way.
• We don’t expect the recent upward momentum to carry forward into 2014. Some of the strength reflects buyers rushing into the market to beat out recent interest rate increases, which will result in a payback later this year.
• Overall, we anticipate relatively stable market conditions in 2014. Further interest rate increases are likely to be modest, while economic growth will continue at a moderate clip. Prospects for higher short-term interest rates later next year are likely to lead to a more pronounced cooling in 2015.
• In this report, we feature differences in affordability across Canada’s major urban markets.
Canada’s major housing markets have been heating up in recent months, prompting us to raise our
near-term outlook. Existing home sales have rebounded smartly, returning to levels reached prior to the latest tightening in mortgage insured lending rules in July of last year. Home prices have also been gaining traction, with momentum strongest in Toronto, Vancouver, Calgary and Edmonton. In light of this recent performance, sales at the national level are now expected to turn in a gain for 2013 as a whole – compared to our June projection of a moderate decline – while estimated price growth has been nudged upward, to 2.7%.
Despite the display of resilience, our medium-term view of relatively stable activity in housing markets has not been altered. A good part of the recent strength is likely tied to increases in 5-year mortgage rates since the spring, which have pulled activity forward. Higher, but still-decent, borrowing costs against a backdrop of lacklustre economic growth is likely to translate into fairly stable housing conditions outside of a few notable pockets in 2014. With some degree of overvaluation persisting in most major housing markets, we still expect a moderate medium-term adjustment in prices to occur alongside a likely increase in short-term interest rates in the latter part of 2014 and 2015. In some markets, notably in Ontario and Québec, increased supply following a period of over-building is expected to increasingly weigh on prices over the forecast period.
near-term outlook. Existing home sales have rebounded smartly, returning to levels reached prior to the latest tightening in mortgage insured lending rules in July of last year. Home prices have also been gaining traction, with momentum strongest in Toronto, Vancouver, Calgary and Edmonton. In light of this recent performance, sales at the national level are now expected to turn in a gain for 2013 as a whole – compared to our June projection of a moderate decline – while estimated price growth has been nudged upward, to 2.7%.
Despite the display of resilience, our medium-term view of relatively stable activity in housing markets has not been altered. A good part of the recent strength is likely tied to increases in 5-year mortgage rates since the spring, which have pulled activity forward. Higher, but still-decent, borrowing costs against a backdrop of lacklustre economic growth is likely to translate into fairly stable housing conditions outside of a few notable pockets in 2014. With some degree of overvaluation persisting in most major housing markets, we still expect a moderate medium-term adjustment in prices to occur alongside a likely increase in short-term interest rates in the latter part of 2014 and 2015. In some markets, notably in Ontario and Québec, increased supply following a period of over-building is expected to increasingly weigh on prices over the forecast period.
Canadian housing market clear for take off?
While some markets, particularly Toronto, tested historical records in September, we are still of the view that a gradual cooling in Canada’s housing market is underway. From a longer-term perspective, four rounds of mortgage insurance rule tightening since 2008 have had a cumulative dampening impact on housing activity. And, despite the recent gains, housing sales neither appear to be too hot, nor too cold. In fact, national existing home sales remain well down from their peaks experienced in the 2007-10 period and are near their 10 year averages. Meanwhile, home prices are on track for a 2.7% gain this year, which is below the average annual appreciation of 8% experienced between 2002 and 2010 and is roughly in line with our estimate of a sustainable long-run rate. More importantly, new home construction is slowly moving back in line with a pace that can be supported by demographic fundamentals. As is typically the case, variations across the country have been witnessed this year. The strength has been concentrated in markets with fewer excesses, like Vancouver, Victoria, Calgary and Edmonton, where markets have already gone through price corrections of various degrees over the past fi ve years. Toronto has been another area of strength. However, the softening in Toronto is occurring where there has been more signs of froth – in housing
construction. Housing starts are down 30% from record levels reached over 2011 and 2012. A number of markets in eastern Canada have been staging a rebound in sales activity in recent months, but activity remains relatively depressed. In Ottawa, Montreal and Québec City, a decade of rapid building appears to be coming home to roost, as sales-to-inventory ratios point to a buyer’s market. In those
markets, prices have either flattened or declined outright this year. On the east coast, housing activity has been muted, reflecting soft job markets for the most part. The number of resales in Atlantic Canada is currently 19% below the peak reached in February of last year. Reduced affordability to keep market in check There are compelling reasons to suggest that the recent upward momentum in Canadian sales and prices is not likely to carry over into next year. For one, economic growth and job creation in most regions has been uninspiring in recent months, and our near-term outlook builds in only a modest improvement (for more details on regional economic performances, please see TD Provincial Economic Forecast).
But perhaps more importantly, housing affordability has eroded significantly from its peak on the back of the tighter lending rules, higher prices and, most recently, increased longer-term mortgage rates. As we noted, the rate increases have the perverse impact of strengthening short term housing activity as buyers move off the sidelines to beat them out. Looking ahead to 2014 and 2015, we anticipate a further – albeit gradual – deterioration in affordability. The accompanying table provides a forecast of affordability changes both nationally and by major market. Affordability is defi ned as the share of income that a family with an average income will have to devote to mortgage payments if they were to purchase an average priced home. Thus, a
higher reading points to an affordability erosion. We base our calculation on the assumption of a 25-year amortization period, a five-year mortgage rate and a conventional 25% down payment.
While some markets, particularly Toronto, tested historical records in September, we are still of the view that a gradual cooling in Canada’s housing market is underway. From a longer-term perspective, four rounds of mortgage insurance rule tightening since 2008 have had a cumulative dampening impact on housing activity. And, despite the recent gains, housing sales neither appear to be too hot, nor too cold. In fact, national existing home sales remain well down from their peaks experienced in the 2007-10 period and are near their 10 year averages. Meanwhile, home prices are on track for a 2.7% gain this year, which is below the average annual appreciation of 8% experienced between 2002 and 2010 and is roughly in line with our estimate of a sustainable long-run rate. More importantly, new home construction is slowly moving back in line with a pace that can be supported by demographic fundamentals. As is typically the case, variations across the country have been witnessed this year. The strength has been concentrated in markets with fewer excesses, like Vancouver, Victoria, Calgary and Edmonton, where markets have already gone through price corrections of various degrees over the past fi ve years. Toronto has been another area of strength. However, the softening in Toronto is occurring where there has been more signs of froth – in housing
construction. Housing starts are down 30% from record levels reached over 2011 and 2012. A number of markets in eastern Canada have been staging a rebound in sales activity in recent months, but activity remains relatively depressed. In Ottawa, Montreal and Québec City, a decade of rapid building appears to be coming home to roost, as sales-to-inventory ratios point to a buyer’s market. In those
markets, prices have either flattened or declined outright this year. On the east coast, housing activity has been muted, reflecting soft job markets for the most part. The number of resales in Atlantic Canada is currently 19% below the peak reached in February of last year. Reduced affordability to keep market in check There are compelling reasons to suggest that the recent upward momentum in Canadian sales and prices is not likely to carry over into next year. For one, economic growth and job creation in most regions has been uninspiring in recent months, and our near-term outlook builds in only a modest improvement (for more details on regional economic performances, please see TD Provincial Economic Forecast).
But perhaps more importantly, housing affordability has eroded significantly from its peak on the back of the tighter lending rules, higher prices and, most recently, increased longer-term mortgage rates. As we noted, the rate increases have the perverse impact of strengthening short term housing activity as buyers move off the sidelines to beat them out. Looking ahead to 2014 and 2015, we anticipate a further – albeit gradual – deterioration in affordability. The accompanying table provides a forecast of affordability changes both nationally and by major market. Affordability is defi ned as the share of income that a family with an average income will have to devote to mortgage payments if they were to purchase an average priced home. Thus, a
higher reading points to an affordability erosion. We base our calculation on the assumption of a 25-year amortization period, a five-year mortgage rate and a conventional 25% down payment.
BRITISH COLUMBIA – RECHARGED
British Columbia’s housing market went through a correction between late 2010 and early 2013. Home sales and prices are still currently 25% and 5% below their 2010 peak, respectively. Housing construction activity is running at a pace that is half of its 2007 pace. Housing weakness was shared equally across Vancouver and Victoria.
• Data since the spring suggest that the recent correction has halted. Sales have staged a moderate rebound, albeit to levels that remain below their 10-year average. Prices have also bounced back modestly. Large foreign investment inflows have been a key supporting factor in these markets, and the decline in home prices over the past few years appears to have rekindled some interest.
• B.C. is expected to enjoy a pickup in economic growth over the next few years, which will provide some underlying support to housing markets. On the fl ip side, B.C. housing markets still appear to be struggling with imbalances. Home price-to-income ratios in Vancouver and Victoria remain relatively high compared to a decade ago as well as in other markets. And, Vancouver has twice as many newly completed but unabsorbed new homes compared to both Toronto and Montreal. These imbalances are likely to limit the upside potential of the market over the next few years.
• Furthermore, the Vancouver and Victoria housing markets are among the most vulnerable to rising interest rates given the lofty average prices. As such, prospects for a gradual increase in borrowing costs are likely to lead to a moderation in housing activity in 2014-15.
• Data since the spring suggest that the recent correction has halted. Sales have staged a moderate rebound, albeit to levels that remain below their 10-year average. Prices have also bounced back modestly. Large foreign investment inflows have been a key supporting factor in these markets, and the decline in home prices over the past few years appears to have rekindled some interest.
• B.C. is expected to enjoy a pickup in economic growth over the next few years, which will provide some underlying support to housing markets. On the fl ip side, B.C. housing markets still appear to be struggling with imbalances. Home price-to-income ratios in Vancouver and Victoria remain relatively high compared to a decade ago as well as in other markets. And, Vancouver has twice as many newly completed but unabsorbed new homes compared to both Toronto and Montreal. These imbalances are likely to limit the upside potential of the market over the next few years.
• Furthermore, the Vancouver and Victoria housing markets are among the most vulnerable to rising interest rates given the lofty average prices. As such, prospects for a gradual increase in borrowing costs are likely to lead to a moderation in housing activity in 2014-15.
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This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specifi c legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and fi nancial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affi liates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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