Canada: slowdown before a new boom?

Lalaine C. Delmendo | March 29, 2020

House prices in Canada’s eleven major cities rose by just 1.95% during 2019 and actually fell by 0.32% when adjusted for inflation, based on figures from Teranet – National Bank of Canada.

Canada house prices

This is a clear slowdown from y-o-y rises of 2.51% in 2018, 8.92% in 2017, and 12.25% in 2016, and the weakest performance since 2008 when house prices declined by 0.79%. In the last quarter of 2019, house prices increased by a minuscule 0.32% (0.14% inflation-adjusted).

However prices are expected to take off soon. Construction has fallen, inventory is low, yet demand is rapidly rising, partly in response to strong immigration.

So far this is not visible (figures from the Canadian Real Estate Association):

  • Apartments posted average gains of 3.35% during 2019 (1.05% inflation-adjusted).
  • One-storey single family home prices rose on average by 3.32% during 2019 (0.97% inflation-adjusted).
  • Two-storey single family home prices increased 3.09% y-o-y (0.79% inflation-adjusted).
  • Townhouse prices increased by 2.55%, on average, over the same period (0.27% inflation-adjusted).

Of Canada’s eleven major cities, Ottawa’s house prices rose most during 2019, with a 7.38% average price rise, followed by Halifax (7.35%), Montreal (6.37%), Hamilton (5.93%), and Toronto (4.48%). Minimal house price increases were seen in Quebec (1.49%), Victoria (1.13%), and Winnipeg (1.02%).

There were house price falls in Vancouver (-4.05%), Edmonton (-1.49%), and Calgary (-0.94%).

Why house prices are expected to rise soon

The central bank has taken repeated action to reduce speculative buying – raising mortgage downpayments and reducing amortization periods. This resulted in a sharp slowdown over the past two years.

However there is now rising demand, falling inventory, and declines in construction. During 2019, dwelling starts and completions fell by 2% and 6.5%, respectively, according to Canada Mortgage and Housing Corporation (CMHC). Listings available for purchase are now running at a 12-year low, based on figures from CREA.

In December 2019, sales activity soared 22.7% from a year earlier, a sharp turnaround from a y-o-y decline of 19% in December 2018, according to CREA’s Statistical Report. Transactions surpassed the previous year’s levels across most of Canada, including all of the largest urban markets. For the whole year of 2019, total sales were estimated at 486,800 units, up 6.2% from a year earlier.

The national average home price stood at CA$ 500,200 (US$ 376,215) in 2019, up by a modest 2.3% from a year earlier, according to CREA. British Columbia and Ontario had the most expensive housing markets in the country, with average prices of CA$ 699,300 (US$ 525,965) and CA$ 606,400 (US$ 456,092), respectively.

The Canadian economy was estimated to have expanded by just around 1.7% in 2019, a deceleration from annual growth of 1.9% in 2018 and 3% in 2017, mainly due to a beleaguered oil and gas industry, coupled with the US-China trade tensions. Bank of Canada expects that the country’s economic growth will remain weak this year, with a projected GDP growth of 1.6%, before partially rebounding to 2% in 2021.

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

A long and steady boom

Canada escaped the major post-2008 collapse in house prices which took place in Europe and the U.S. House prices have risen almost continuously for 17 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 2019, house prices surged by 27.8% (18.5% inflation-adjusted).
Canada house price index

House price rises expected to accelerate again

House price growth is expected to accelerate again this year, amidst strong increase in demand, coupled with limited supply. The national average price forecast to increase by 6.2% y-o-y to CA$531,000 (US$398,600), according to CREA’s Quarterly Forecasts.

However, there are significant regional variations:

  • Ontario is expected to post the biggest annual rise in house prices of 6.9% during 2020, to an average of CA$ 648,100 (US$486,470).
  • House prices are also expected to increase by 5% in Quebec, 4.9% in Prince Edward Island, 4.5% in Nova Scotia, 4.2% in British Columbia, and 4% in New Brunswick. Manitoba is projected to post a meager house price growth of 0.5% this year.
  • In contrast, Saskatchewan is expected to register the biggest y-o-y decline in house prices of 1.3% this year, to an average of CA$281,100 (US$210,996), followed by Newfoundland (-1%) and Alberta (-0.4%).

Home sales rising again

In December 2019, actual sales soared 22.7% from a year earlier, a sharp turnaround from a y-o-y decline of 19% in December 2018, according to CREA’s Statistical Report. Transactions surpassed the previous year’s levels across most of Canada, including all of the largest urban markets.

For the whole year of 2019, total sales were estimated at 486,800 units, up 6.2% from a year earlier. New Brunswick saw the biggest increase in sales in 2019 at 14.6%, followed by Quebec (11%), Newfoundland (9.7%), Ontario (9%), Nova Scotia (8.7%), Manitoba (8%) and Saskatchewan (1.5%). On the other hand, sales activity fell in Prince Edward Island (-8.5%), British Columbia (-2.3%) and Alberta (-0.5%).

Canada sales activity

Nationwide sales activity is projected to rise strongly by another 8.9% y-o-y in 2020, to 529,900 units, based on CREA’s projections.

“The national resale housing market outlook continues to be supported by population and employment growth while consumer confidence is benefiting from low unemployment rates outside oil-producing provinces,” said CREA. “Additionally, the Bank of Canada is widely expected to not raise interest rates in 2020.”

Moreover, the government launched its First-Time Home Buyer Incentive in early-2019 which aims at helping first-time homebuyers reduce their monthly mortgage payments without adding to their financial burdens. Under the CA$ 1.25 billion shared equity program, the government contributes a portion of the home purchase price in exchange for an equity share of the home’s value.

Residential construction activity continues to fall

Dwelling starts fell by 2% to 208,685 units in 2019 from a year earlier, following a 3.1% decline in 2018, according to CMHC.

By property type:

  • Apartments: starts up 4.7% in 2019 to 117,651 units, after rising by 9.6% in the prior year
  • Single family homes: starts down 15.3% y-o-y to 55,869 units in 2019, following a 14.2% decline in 2018
  • Semi-detached houses: down 8.9% y-o-y to 10,018 units last year, after falling by 10.6% in 2018
  • Row houses: up 7% y-o-y to 25,147 units in 2019, after falling by 16.2% in the prior year

Likewise, dwelling completions fell by 6.5% y-o-y to 187,177 units last year.

canada housing starts and completions

Ontario accounted for about a third of all dwelling starts in Canada in 2019, followed by Quebec (23%) and British Columbia (21.5%), according to CMHC’s recent report.

Interest rates stabilizing, mortgage market continues to grow

Mortgage interest rates are now stabilizing in Canada.

  • Interest rates on 1-year mortgages averaged 3.64% in January 2020, unchanged from a year earlier but up from 3.34% two years ago.
  • Interest rates on 3-year mortgages averaged 3.94% in January 2020, down from 4.29% in January 2019 and 4.15% in January 2018.
  • Interest rates on 5-year mortgages averaged 5.19% in January 2020, down from 5.34% in January 2019, but slightly up from 5.14% two years ago.

In October 2018, the central bank raised its key rate by 25 basis points to 1.75%, the fifth consecutive rate hike since July 2017, in an effort to keep the economy from overheating and curb inflationary pressures. The key rate was kept unchanged since.

Canada interest rates

Despite this, the mortgage market continues to expand. In November 2019, the amount of residential mortgage debt outstanding rose by 5.4% to CA$1.63 trillion (US$1.22 trillion) from a year earlier, according to Statistics Canada. The size of the mortgage market expanded strongly in recent years, rising from 39.8% of GDP in 2000, to 54.2% of GDP in 2008, to 63.3% of GDP in 2014 and finally to about 70.8% of GDP in 2019.

Several rounds of market cooling measures

In October 2017, the Office of the Superintendent of Financial Institutions (OSFI) introduced another set of cooling measures targeting borrowers in the uninsured mortgage market, requiring 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 latest 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 Canadaor 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.

The new stress test requirement disqualifies about one in every five potential buyers, reducing property demand, according to a survey conducted by the Mortgage Professionals Canada.

Canada outstanding mortgages

This followed measures introduced in 2016 to discourage speculation:

  • From August 2, 2016, foreign nationals and foreign-controlled companies were required to 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 homebuyers who made greater than 20% down payments, faced 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. Till this year none of these measures have had much effect.

Rents rising modestly, rental yields remain healthy

Gross rental yields in Montreal remain healthy, ranging from 4% to 6%, according to Global Property Guide research. A small apartment of 60 sq. m. in Montreal offers a return of around 6%. 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 4.5%.

In Toronto, gross rental yields are lower, at between 3.9% and 5.5%, sometimes even lower. Taking account of the fact that we give gross figures - a guess might be that net yields would be 2% lower.

Canada average monthly rents

Average rents in Canada rose by 5.4% to CA$1,040 per month (US$781) during the year to October 2019, according to the CMHC. Ontario had the highest rent increase, up by 6.3% y-o-y in October 2019, followed by British Columbia (5.8%), Quebec (5.3%), and New Brunswick (5.2%). More modest rent rises were seen in Nova Scotia (4.4%), Manitoba (4%), Newfoundland and Labrador (2.3%), Prince Edward (2.1%), Alberta (1.8%), and Saskatchewan (1.1%).

British Columbia had the most expensive rental housing in Canada, with an average monthly rent of CA$ 1,320 (US$991) in October 2019, followed by Ontario with monthly rent of CA$ 1,273 (US$956), and Alberta with monthly rent of CA$ 1,136 (US$853). Quebec registered the lowest monthly rent of CA$ 800 (US$ 600).

Vacancy rates are falling

The national vacancy rate was 2.2% in 2019, down from 2.4% in 2018, 3% in 2017, 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 in recent years, an increasing number of Canadians have no choice but to rent.

In 2019:

  • Bachelor-type: 3%, slightly up from 2.9% a year earlier
  • One-bedroom: 2.3%, slightly down from 2.4% a year earlier
  • Two-bedroom: 2.2%, down from 2.4% a year earlier
  • Three-bedroom: 1.5%, down from 1.8% a year ago

“The national vacancy rate for purpose-built rental apartments declined for a third consecutive year in 2019, as strong rental demand continued to outpace growth in supply,” said Bob Dugan, CMHC’s chief economist. “Low vacancy rates in major centres underscore the need for increased rental supply to ensure access to affordable housing.”

Canada rental vacancy rate

Prince Edward Island had the lowest vacancy rate in Canada of just 1.2% in 2019, followed by Nova Scotia (1.4%), British Columbia (1.5%), Quebec (1.8%) and Ontario (2%). On the other hand, Saskatchewan had the highest vacancy rate, at 8.1% in 2019, followed by Newfoundland and Labrador (7%), Alberta (5.4%), Manitoba (3.1%), and New Brunswick (2.6%).

Oilpatch woes adversely affecting the Canadian economy

The Canadian economy was estimated to have expanded by just around 1.7% in 2019, a deceleration from annual growth of 1.9% in 2018 and 3% in 2017, mainly due to a beleaguered oil and gas industry, coupled with the US-China trade tensions.

Canada’s oil and gas industry is expected to continue to suffer this year, amidst the widening price differentials between benchmark US oil prices and Western Canadian Select (WCS) heavy crude oil and the potential negative impact of the corona virus outbreak.

To stop the spread of the virus, people are now advised to limit or cancel their travels especially to China – which is expected to reduce fuel demand. “The estimates are very fluid,” said RS Energy Group VP Al Salazar. “The snowballing effect of all the airlines cancelling flights and the fear factor, which is almost impossible to quantify, of people just staying home, really can spike this up.”

Canada unemployment

Canada’s oil industry accounts for about 10% of the country’s GDP. Canada has the world’s third largest oil reserves and is the world’s fifth largest oil producer and fourth largest oil exporter.

The oil price gap between Canadian crude and US benchmarks hit above US$20 per barrel for most of January 2020, after averaging just US$12.7 per barrel during 2019.

“The suppressed prices are coming on the back of strengthened supply, in particular of heavy crude amid upgrader maintenance,” said JBC Energy. “Furthermore, Albertan stock levels jumped to 74 million barrels in November, within grasp of the all-time highs seen in 2018 and earlier last year.”

Alberta, Canada’s largest oil producing province, has been gradually lifting the mandatory production cuts that were introduced last January 2019. But as the cuts are phased out and production increases, the industry finds itself facing the age-old problem of insufficient pipeline capacity.

Bank of Canada expects that the country’s economic growth will remain weak this year, with a projected GDP growth of 1.6%, before partially rebounding to 2% in 2021.

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

The downside is that the budget deficit is now swelling.

Recently, the government unveiled that the budget deficit for the 2019-20 fiscal year was estimated around CA$ 26.6 billion (US$20.2 billion), larger than the previous forecast of CA$19.8 billion (US$15 billion) and sharply up from a deficit of just CA$1 billion (US$751 million) four years ago. The federal government has run deficits every year since 2015, despite continued economic growth.

The deficit is expected to peak at CA$ 28.1 billion (US$21.4 billion) in the 2020-21 fiscal year, before falling to CA$11.6 billion (US$8.6 billion) in 2024-25.

Canada’s debt-to-GDP ratio edged up to 31% in FY 2019-20, from 30.8% in the prior year. It is projected to remain at that level through the end of 2021.

The country’s annual inflation rate stood at 2.2% in December 2019, unchanged from the previous month but slightly up from 2% a year earlier, according to Statistics Canada. The Bank of Canada expects inflation to remain around the 2% target this year, with some fluctuations due to volatility in energy prices.

In January 2020, the nationwide unemployment was 5.5%, down from 5.6% in the previous month and 5.8% a year earlier, according to Statistics Canada. British Columbia had the lowest jobless rate of 4.5%, followed by Quebec (5.1%), Manitoba (5.1%), Ontario (5.2%), and Saskatchewan (6%). Newfoundland and Labrador had the highest jobless rates in January 2020, at 11.9%.

During the October 2019 elections, Justin Trudeau’s Liberal Party has retained power but fell short of an outright majority, amidst a series of scandals that have rocked his first term. The Liberals of Prime Minister Justin Trudeau came to power in October 2015, on the back of campaign promises to shift the tax burden from the middle-income earners to the richest Canadians, and to run a budget deficit to allow spending on infrastructure and boost economic growth.

An influx of immigrants buoys property demand

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 more than 323,000 immigrants in the 2015-16 fiscal year, the largest number since 1910, according to Statistics Canada. In 2019, the Canadian government welcomed 341,180 immigrants, after admitting 321,055 newcomers in 2018 and 286,510 immigrants in 2017.

The government expects another 341,000 immigrants this year.

In November 2017, Canada’s then Minister of Immigration, Refugees and Citizenship Ahmed Hussen unveiled the government’s plan to let a million new immigrants in over the succeeding three years, in an effort to meet the country’s economic needs. The plan, dubbed as “Growing Canada’s Economic Future”, aims to increase the number of new immigrants by more than 300,000 annually from 2018 to 2020.

Canada gdp growth and inflation rate

“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.

In October 2018, the government unveiled an updated multi-year immigration plan that includes a target of about 350,000 new immigrants in 2021, which is nearly 1% of its population.

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 of the Canadian Immigrant Settlement Sector Alliance.


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