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Is Canada’s amazing house price boom coming to an end?

Last Updated: February 14, 2018

Canada house pricesCanada’s housing market remains very strong, with house prices continue to accelerate. However, it is expected to slow this year, amidst the introduction of another set of market-cooling measures, on the backdrop of rising mortgage interest rates.

House prices in Canada’s eleven major cities rose by 9.07% during 2017 (7.07% inflation-adjusted), after y-o-y rises of 12.34% in 2016, 6.19% in 2015, 4.95% in 2014, 3.81% in 2013, and 3.08% in 2012, based on figures from Teranet – National Bank of Canada.

During the latest quarter house prices actually declined 1.3% in Q4 2017 (-1.3% inflation-adjusted).

The central bank has taken action repeatedly–from raising mortgage downpayment requirements to reducing amortization periods–but house prices still spiral up as if nothing could stop them. The latest round, which became effective January 1, 2018, targets borrowers in the uninsured mortgage market.

Serious people who understand these things have been issuing dire warnings. The Canada Mortgage and Housing Corporation (CMHC) recently made clear that overvaluation and price acceleration were causing stresses in the housing market.

“While house price growth has slowed, house price levels remained high relative to underlying economic fundamentals such as income and population growth,” said Dana Senagama of CMHC. “Therefore, we continue to find strong evidence of overvaluation.”

According to the Canadian Real Estate Association (CREA):

  • Apartment prices, on average, posted the strongest year-on-year gains of 20.5% in December 2017.
  • Townhouses/row houses prices also increased by 13% in December 2017 from a year earlier.
  • The average price of a one-storey single family home rose by 5.5% during the year to December 2017.
  • The average price of a two-storey single family home rose by 4.5% over the same period.

The national average MLS home price stood at CA$600,300 (US$476,600) in December 2017, up 9.1% from the previous year, according to CREA. The figure is pushed up by strong house price rises in Greater Vancouver and Greater Toronto, Canada’s most active and expensive housing markets.

House prices continue to rise in Canada’s eleven major cities. 

  • Vancouver’s house prices recorded the biggest year-on-year rise of 15.97% during 2017, followed by Victoria (11.47%), Hamilton (11.28%), Toronto (9.02%) and Montreal (7.05%).
  • There were more modest house price increases in Ottawa (5.1%), Winnipeg (4.02%), and Halifax (3.59%).
  • Marginal house price increases were seen in Calgary (0.53%), Quebec (0.42%), and Edmonton (0.22%).

A long and steady boom accelerates

Canada escaped the major post-2008 collapse in house prices which took place in Europe and the U.S.  But the situation looks worrying.  House prices have risen almost continuously for 16 years:

  • From Q1 2000 to Q1 2009, house prices rose by 79% (49% inflation-adjusted), due to low interest rates and economic growth.
  • From Q2 2009 to Q3 2012, house prices increased by another 24% (17% inflation-adjusted), despite government efforts to cool the housing market.
  • From Q4 2012 to Q4 2015, tighter mortgage rules implemented in July 2012 helped calm the market, but house prices still rose by around 15.7% (10.8% inflation-adjusted).
  • From 2016 to 2017, house prices surged by 22.5% (18.5% inflation-adjusted).

However there are signs that demand may be slowing, after repeated moves to tighten mortgage lending. There were about 513,900 homes sold in 2017, down by 4% from a year earlier, according to CREA - but it is still the second highest level ever recorded. Ontario and British Columbia accounted for about two-thirds of total transactions.

The Canadian economy grew by a healthy 3% in 2017, the highest growth since 2011, amidst strong growth in consumption and residential investment, as well as business investment, according to the Bank of Canada. The economy is expected to expand by 2.2% this year and by another 1.9% in 2019.

There are virtually no restrictions on foreigners buying properties in Canada.

Housing market outlook

Canada house price index

Nationwide house prices are expected to fall slightly this year, amidst higher expected mortgage rates, tighter market conditions, and the impact of a new set of regulatory changes.

“The national average price is forecast to edge down by 1.4% to CA$503,100 in 2018, in large part due to a record number of higher-priced home sales in and around Toronto in early 2017 that is not expected to be repeated in 2018,” said CREA.

However, there are significant regional variations:

  • Ontario is expected to post the biggest annual decline in house prices of 2.2% during 2018, to an average of CA$573,700 (US$455,480).
  • House prices are also expected to decline by 1.9% in Newfoundland and by 0.3% in Alberta.
  • House prices in British Columbia and Saskatchewan are projected to remain stable this year, at CA$708,600 (US$562,582) and CA$295,100 (US$234,290), respectively.
  • In contrast, house prices in British Columbia will continue to rise by 4.2% in 2018, to average of CA308,400 (US$244,849).
  • House prices will increase less in Nova Scotia (2%), New Brunswick (1.8%), Manitoba (1%), and Prince Edward Island (0.9%).

Home sales are projected to decline by 5.3% to 486,600 units in 2018, according to CREA. Ontario is forecast to see the largest decline in sales in 2018 at 9.6%, followed by Price Edward Island (-7.4%), Manitoba (-3.9%), Saskatchewan (-3.8%), and British Columbia (-3.7%). Home sales are expected to fall less in Alberta (-2.8%), Nova Scotia (-2.8%), and New Brunswick (-0.5%). On the other hand, sales activity is expected to increase slightly in Newfoundland (1.3%) and Quebec (0.9%).

“The overwhelming majority of the forecast decline in sales next year reflects an expected decline in Ontario sales, with activity anticipated to remain well below the record-levels logged in early 2017,” said CREA. “Indeed, new mortgage rules are expected to lower 2018 sales in all provinces except Quebec and Newfoundland and Labrador.”

Residential construction activity increasing

Dwelling starts rose by 12% to 202,618 units in 2017 from a year earlier, in sharp contrast with a y-o-y decline of 0.5% in 2016 and the highest level since 2004, according to Canada Mortgage and Housing Corporation (CMHC).

By property type:

  • Apartments: up 14% y-o-y in 2017 to 100,425 units
  • Single family homes: up 4.7% y-o-y to 63,565 units
  • Semi-detached houses: up 13.6% y-o-y to 11,403 units
  • Row houses: up 23.1% y-o-y to 27,225 units

Likewise, dwelling completions also increased 1.2% y-o-y to 175,247 units last year, after falling by 3.4% in 2016.

canada housing starts and completions

Ontario accounted for more than 37% of all dwelling starts in Canada in 2017, followed by British Columbia (20.3%) and Quebec (20.1%).

Mortgage interest rates are rising

Mortgage interest rates are now rising gradually in Canada.

  • Interest rates on 1-year mortgages averaged 3.34% in January 2018, up from 3.14% a year earlier.
  • Interest rates on 3-year mortgages averaged 4.15% in January 2018, up from 3.39% a year earlier.
  • Interest rates on 5-year mortgages averaged 5.14% in January 2018, up from 4.64% a year earlier. 

Canada interest rates

In January 2018, the central bank raised its key rate by 25 basis points to 1.25%, the third consecutive rate hike in the past six months, amidst strong economic growth and tamed inflation. The key rate had been raised by 0.25% in July 2017 and by another 0.25% in September 2017.

Despite this, the mortgage market continues to expand. In November 2017, the amount of residential mortgage debt outstanding rose by 5.6% to CA$1.51 trillion (US$1.2 trillion) from a year earlier, according to Statistics Canada. The size of the mortgage market expanded strongly, rising from 54.2% of GDP in 2008 to 65% of GDP in 2014 and finally to about 71% of GDP in 2017.

New market cooling measures

In October 2017, the Office of the Superintendent of Financial Institutions (OSFI) announced another set of cooling measures targeting borrowers in the uninsured mortgage market. It will require lenders to test borrowers’ ability to pay higher interest rate than the one they have actually been offered, to test their creditworthiness if borrowing costs rise.

The new measures, which came into effect on January 1, 2018, apply to all federally regulated financial institutions.

  • OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages. The minimum qualifying rate is now the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%, whichever is higher.
  • OSFI is requiring lenders to enhance their loan-to-value (LTV) measurement and limits so they will be dynamic and responsive to risk.
  • OSFI is placing restrictions on certain lending arrangements that are designed to circumvent LTV limits.

Canada outstanding mortgages

Based on a survey conducted by the Mortgage Professionals Canada, the new stress test requirement will disqualify about one in every five potential buyers, which will reduce property demand.

“Unlike past rule changes, this one comes in an environment of Bank of Canada tightening, and as Toronto’s detached market is already correcting in the wake of separate provincial policy measures,” said Doug Porter and Rober Kavcic of the Bank of Montreal.

In 2016, the government also introduced measures aimed at stabilizing the housing market and ensuring that homebuyers are not taking on bigger mortgages than they can afford.

  • From August 2, 2016, foreign nationals and foreign-controlled companies must pay 15% in additional property transfer tax on residential property transfers in Greater Vancouver. A 15% tax is equivalent to around CA$300,000 on the sale of a CA$2 million home.
  • From October 17, 2016 low ratio homebuyers, i.e. those who make a greater than 20% down payment, will face the same insurance requirements as those with lower down payments.
  • While any financial gain from selling a primary residence remains tax-free, the government now requires sellers to report the sale at tax time to the Canada Revenue Agency.
  • The government has also launched consultations on limiting the government’s financial obligations in the event of widespread mortgage defaults.

Other market-tightening measures date back to July 2012, with a significant ratcheting-up of pressure in 2013 and 2014.  So far, none of these measures has had much effect.

Rents rising, rental yields remain healthy

Canada average monthly rents

Gross rental yields in Montreal remain healthy, ranging from 5.4% to 7% in early 2017, according to Global Property Guide research. A small apartment of 60 sq. m. in Montreal offers a return of around 7%. In this low-return era, in a low-risk country such as Canada, that is a really acceptable, not to say enticing, yield. Even on a largish 120 sq. m. apartment in Montreal, one can likely earn a gross rental return of 5.4%.

In Toronto, rental yields are lower, which range from 4.4% to 5% in early 2017.

Average rents in Canada rose by 3.2% to CA$956 per month (US$759) during the year to October 2017, according to the Canada Mortgage and Housing Corporation (CMHC). British Columbia had the highest rent increase, up by 5.89%, followed by Ontario (4.66%), and Manitoba (4.47%). More modest rent rises were seen in Nova Scotia (3.8%), Prince Edward Island (3.53%), Northwest Territories (3.26%), New Brunswick (1.36%), and Quebec (1.24%). Only Newfoundland and Labrador, Alberta and Saskatchewan recorded minimal rent declines of 0.97%, 0.72%, and 0.3%, respectively.

The Northwest Territories had the highest monthly rent of CA$1,679 (US$1,333) in October 2017, followed by British Columbia, with monthly rent of CA$1,169 (US$928) and Ontario, with monthly rent of CA$1,146 (US$910). Quebec had the lowest rent of CA$736 (US$584) per month.

Vacancy rates are falling

Canada rental vacancy rate

The national vacancy rate was 3% in 2017, down from 3.7% in 2016 and 3.5% in 2015, according to the CMHC. It is considered very low by international standards. Because of skyrocketing house prices, an increasing number of Canadians have no choice but to rent.

In 2017:

  • Bachelor-type: 3.5%, down from 4.4% a year earlier
  • One-bedroom: 2.9%, down from 3.4% a year earlier
  • Two-bedroom: 3%, down from 3.7% a year earlier
  • Three-bedroom: 3%, down from 3.9% a year ago

Prince Edward Island and British Colombia had the lowest vacancy rates of just 1.1% and 1.3%, respectively. On the other hand, Saskatchewan had the highest vacancy rate, at 8.8% in 2017, followed by Alberta (7.4%%), Newfoundland and Labrador (6.4%) and New Brunswick (4.1%).

Strong economy, record-low unemployment

Canada unemployment

The Canadian economy grew by a healthy 3% in 2017, the highest growth since 2011, amidst strong growth in consumption and residential investment, as well as business investment, according to the Bank of Canada.

“Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth,” said Bank of Canada. “Business investment has been increasing at a solid pace, and investment intentions remain positive.”

The economy is expected to grow by 2.2% this year and by another 1.9% in 2019, based on central bank estimates.

The government has increased spending on infrastructure, cut some taxes, and increased child benefits, among others.

The downside is that budget deficit is now swelling. During the 2016-17 fiscal year, the government ran a deficit of CA$17.8 billion (US$14.13 billion), sharply up from a deficit of just CA$1 billion (US$794 million) a year earlier.

The deficit is expected to increase further to CA$19.9 billion (US$15.8 billion) in the 2017-18 fiscal year.

The country’s annual inflation rate stood at 1.9% in December 2017, from 2.1% in November, 1.4% in October and 1.6% in September 2017. The Bank of Canada expects inflation to average 2% in 2018 and 2.1% in 2019.

In January 2018, the nationwide unemployment fell stood at 6.2%, down from last year’s 7.2%, according to Statistics Canada. British Columbia had the lowest jobless rate of 5.2%, followed by Ontario (5.7%), Quebec (6%), Manitoba (6%), and Saskatchewan (6%). Newfoundland and Labrador had the highest jobless rates in January 2018, at 16.7%.

An influx of immigrants buoys property demand

Canada gdp growth and inflation rate

In an effort to fill the gap left by retiring baby boomers, Canada liberalized its immigration regulations in 2015. As a result, Canada took in 321,000 immigrants in the 2015-16 fiscal year, the largest number since 1910, according to Statistics Canada. Another 300,000 immigrants were admitted to Canada in the succeeding year.

In November 2017, Canada’s Minister of Immigration, Refugees and Citizenship Ahmed Hussen unveiled the government’s plan to let a million new immigrants over the next three years, in an effort to fulfill the country’s economic needs. The plan, dubbed as “Growing Canada’s Economic Future”, aims to increase the number of new immigrants to 310,000 in 2018, 330,000 in 2019, and 340,000 in 2020.

“This historic multi-year immigration levels plan will benefit all Canadians because immigrants will contribute their talents to support our economic growth and innovation, helping to keep our country at the forefront of the global economy,” said Hussen.

About five million Canadians are set to retire by 2035.

“Nothing is going to impact this country besides increased automation and technology more than immigration will and this impact will grow in response to declining birth rate, aging population and accelerated retirements,” said Chris Friesen, director of the Canadian Immigrant Settlement Sector Alliance.

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