Canada’s house prices surging!

October 04, 2016

Canada house pricesCanada’s housing market continues to grow stronger, despite repeated market-cooling measures and an economy that is struggling.

House prices in Canada’s eleven major cities rose by 11.42% during the year to August 2016 (10.21% inflation-adjusted), up from a modest 5.39% y-o-y growth during the same period last year, based on figures from Teranet – National Bank of Canada.

This is the highest annual house price growth in six years.

The central bank has taken action repeatedly, but the house prices still spiral up, as if nothing can stop them. Serious people who understand these things have been issuing dire warnings. The Canada Mortgage and Housing Corporation (CMHC) recently made clear that it felt that Canadian major cities’ housing markets are mostly overvalued. 

“A downside risk to our outlook stems from the recent detection of overvaluation in nine major Canadian centres, and uncertainty over how these imbalances will unfold in specific housing markets,” said the CMHC.

According to the Canadian Real Estate Association (CREA):

  • The average price of a two-storey single family home increased by 16.3% y-o-y to August 2016.
  • The national average price of a one-storey single family home rose by 14.4% during the year to August 2016.
  • Townhouses / row houses prices also increased by 16.3% in August 2016 from a year earlier.
  • Apartment prices increased by 11.7%, on average, over the same period.

The national average home price stood at CA$456,722 (US$347,899) in August 2016, according to CREA.  The figure is pushed up by Greater Vancouver and Greater Toronto, Canada’s most active and expensive housing markets, and when these two are excluded the annual average price is reduced by around CA$100,000 (US$76,173) to CA$357,033 (US$271,963).

There have been big regional variations:

  • Tight housing supply in Greater Toronto Area (GTA) and Greater Vancouver, plus low interest rates, pushed their house prices upward
  • The oil price slump hit oil-producing areas such as Calgary, dragging house prices down

Of Canada’s eleven major cities, eight experienced house price rises during the year to August 2016. Vancouver’s house prices recorded the biggest rise of 25.75%, followed by Victoria (17.55%), Toronto (14.59%), and Hamilton (12.96%).

House prices rose less in Winnipeg (3.08%), Halifax (1.06%), Ottawa (0.99%), and Montreal (0.55%).

House prices fell in Calgary (-4.48%), Quebec (-3.18%), and Edmonton (-0.34%).

Canada´s economy shrank by an annualized rate of 1.6% in Q2 2016, the biggest decline since Q2 2009, amidst a decline in exports, especially for energy products, according to Statistics Canada. Battered by the oil price decline Canada´s economy grew just 1.2% last year, less than half the 2.5% growth seen in 2014. The economy is expected to expand by 1.5% this year and by 1.9% in 2017, according to the IMF.

Housing market outlook

Canada house price index

Nationwide house prices are expected to continue rising this year, following a strong start led by British Columbia and Ontario.  CREA projects that in 2016 the national average price will rise by 10.1% to CA$487,800 (US$371,572).

According to CREA:

  • British Columbia will see a house price increase of 9.2% in 2016 to reach an average of CA695,000 (US$529,403).
  • Ontario’s house prices are expected to rise by 12.7% to CA$524,600 (US$399,604) during 2016.
  • In Prince Edward Island, house prices are also expected to rise by 9.3% y-o-y in 2016.
  • House prices are projected to increase by 1.6% in Manitoba and by 2.1% in both Quebec and New Brunswick.
  • House prices in Alberta, Saskatchewan, and Nova Scotia are expected remain largely steady this year.
  • Newfoundland and Labrador’s house prices are forecast to ease by 6.4% this year.

Home sales are projected to increase modestly this year.

Housing starts in Canada are expected to moderate in 2016 as compared to last year. Lower housing starts are forecast in oil-producing regions such as Alberta, Saskatchewan, ad Newfoundland and Labrador, partly offset by higher starts in other provinces.

New property tax suppressing demand

About 60% of all local markets experienced a decline in sales in August 2016 from the previous month, led by a steep decline in Greater Vancouver following the introduction of a new property transfer tax on homes purchased by foreign buyers.

canada housing starts and completions

“The sudden introduction of the new property transfer tax on homes purchased by foreign buyers in Metro Vancouver has created a cloud of uncertainty among home buyers and sellers,” said CREA President Cliff Iverson.

“That the tax applies to sales that had not yet closed shows how the details for a new tax policy can unnecessarily destabilize housing markets. More broadly, it speaks to the importance of evidence-based decision making to ensure that unintended consequences and collateral damage are minimized when new policies or tighter regulations affecting housing markets are being actively considered.”

Housing starts rose by a meagre 0.2% to 115,844 units in the first eight months of 2016 from the same period last year, according to Canada Mortgage and Housing Corporation (CMHC). Housing completions, on the other hand, fell by 9.1% to 111,050 units in Jan-Aug 2016 from the same period last year.

Mortgage interest rates are at historic lows

The main reason for the house price rises is that Canadian mortgage rates are enticingly low:

  • Interest rates on 1-year mortgages averaged 3.14% in September 2016, down from 6.65% in September 2008.
  • Interest rates on 3-year mortgages averaged 3.39% in September 2016, down from 6.7% in September 2008.
  • Interest rates on 5-year mortgages averaged 4.64% in September 2016, down from 6.85% in September 2008. 

Canada interest rates

In September 2016, the central bank held its key rate unchanged at 0.5%, amidst slowing exports and tamed inflation. Previously the key rate had been 1% since September 2010., but was cut by 0.5% over the past 21 months.

In June 2016, the amount of residential mortgages rose by 6.2% to CA$1.39 trillion (US$1.06 trillion) from a year earlier, according to Statistics Canada.

The history of a long and steady boom

Canada escaped the excessive housing booms, which took place in the U.S. and in Europe, and avoided a major collapse in prices.  But Can ada´s house prices have risen almost continuously for 15 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).

Nationwide house prices are expected to continue rising strongly this year, by more than 10%, according to CREA.

Market cooling measures

Effective August 2, 2016, foreign entities, which include foreign nationals and foreign-controlled companies, will be charged an additional property transfer tax of 15% on residential property transfers in Greater Vancouver, in an effort to cool property demand. A 15% tax will be equivalent to around CA$300,000 tax on the sale of a CA$2 million home.

Canada outstanding mortgage

Moreover since June 2015, new tougher CMHC mortgage rules have made life harder for buyers with self-employment income, or with little cash for down payments:

  • The CMHC increased the "qualifying" rate for mortgages under five years.  “Qualify” means that the borrower must prove he can afford to repay at a higher rate.  For instance, if you apply for a 2.25% five-year variable mortgage, lenders generally make you "qualify" at their posted 5-year rate (currently 4.64%).
  • "Third-party verification" of income is now required by lenders of all borrowers, including the borrower´s income history and employment status.
  • Cash-back down payment mortgages are no longer permissible if the buyer is unable to provide a 5% down payment on his own.

Canada’s booming housing market has long been a concern for the authorities.

In July 2012, tighter mortgage rules took effect:

  • The maximum length of mortgage borrowers could obtain was reduced, from 30 years to 25 years.
  • The maximum LTV ratio was lowered from 85% to 80%
  • The maximum gross debt service (GDS) was limited to 39% of income, and total debt service (TDS) to 44%
  • Mortgage insurance on properties over $1 million was banned.

In mid-2013, the Canada Mortgage and Housing Corporation (CMHC) limited its guarantees to banks and other lending companies.

In early 2014, the CMHC discontinued mortgage insurance for condominium construction, and ceased providing mortgage insurance to second home buyers or to self-employed borrowers without third-party income validation.

So far, none of these measures has prevented property prices rising, no doubt because of the very low interest-rate environment.

Rents rising, rental yields remain healthy

Canada average monthly rate

Average rents in Canada rose by 2.7% to CA$907/month (US$691) during the year to October 2015, according to the Canada Mortgage and Housing Corporation (CMHC). All provinces saw higher average rents for apartments from a year earlier. Nova Scotia had the highest rent increase, up by 4.1%, followed by Manitoba (3.8%) and British Columbia (3.7%).

The Northwest Territories had the highest monthly rent of CA$1,660 (US$1,264) in October 2015, followed by Alberta, with monthly rent of CA$1,162 (US$885). Quebec had the lowest rent of CA$712 (US$542) per month.

Gross rental yields in Montreal remain healthy, ranging from 4.4% to 7% as of March 2016, according to Global Property Guide research. Montreal’s average rental yield stood at around 5.4% to 7% in March 2016.

In Toronto, rental yields range from 4.4% to 5% in March 2016.

Vacancy rates remain low

Canada rental vacancy rate

The national vacancy rate was 3.5% in 2015 according to the CMHC, slightly higher than the 3% seen last year, but still very low by international standards. Because of skyrocketing house prices, an increasing number of Canadians have no choice but to rent.

New Brunswick had the highest vacancy rate of 7.4% in 2015, followed by Saskatchewan (6.4%), Alberta (5.7%), Prince Edward Island (4.8%), Quebec (4.3%), and Newfoundland and Labrador (4.1%). British Colombia has the lowest vacancy rate of just 1.2%.

Budget deficit swells on stimulus spending

In Q2 2016, Canada´s economy shrank by an annualized rate of 1.6%, the biggest decline since Q2 2009, amidst a decline in exports, especially for energy products, according to Statistics Canada. Exports of goods and services fell by 16.7% in Q2 2016 from a year earlier.

However the economy is expected to expand by 1.5% this year and by 1.9% in 2017, according to the IMF.

In an effort to boost economic growth, 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, without any dramatic rise in economic growth. In July 2016, the country posted a budget deficit of CA$1.76 billion (US$1.34 billion), in sharp contrast with a surplus of CA$150 million (US$114 million) during the same period last year.

Four months into the 2016-17 fiscal year, the country is now running a deficit of CA$2.76 billion (US$2.1 billion) compared to a surplus of CA$5.16 billion (US$3.93 billion) a year ago.

The country’s annual inflation rate stood at 1.1% in August 2016, the lowest in two years, amidst lower fuel prices, according to Statistics Canada.

In August 2016, unemployment edged up slightly to 7%, from 6.9% in the previous month.

An influx of immigrants to buoy property demand

Canada gdp growth and inflation rate

In an effort to fill the gap left by retiring baby boomers, last year Canada liberalized its immigration regulations. As a result, Canada took in 321,000 immigrants in the 2015-16 fiscal year, the largest number since 1910, according to Statistics Canada.  The record number of immigrants and refugees caused the population to grow by 1.2% during the year. As of July 1, 2016, Canada’s official population reached 36,286,425, the biggest annual increase since 1988.

“Canada is an aging country, so we are in need of new blood,” says Canadian Immigration Minister John McCallum. “Canadians aren’t having enough babies and so the labour force growth depends very much on the entrance of immigrants.”

The immigrants are expected to reignite the economy - and boost the housing market further.

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