Is the Canadian housing correction unfolding?
Author: Mike Archibald
April 19, 2018
Canadian existing home sales rose 1.3% in March, offering very little relief to a 19% decline in the first two months of 2018. Granted much of this steep drop can be attributed to OSFI measures, which took effect at the start of the year, the Canadian housing market finds itself in a precarious position.
From a year ago, Canadian home sales volumes are down 22.7% as 20 of 26 major markets have reported reduced activity. And home prices may soon follow with Canada seen as having the most overvalued home prices in the world, on average, as compared to income and rent.
|Country||1) Home price/income (% above historical average)||2) Home price/rent (% above historical average)||Current average over/undervaluation of home prices (=average of column 1) and 2) (%))|
Source: UBS, September 2017
Toronto home sales volumes have slid 40% year-over-year and home prices recorded their first annualized decline since 2009 in March, albeit a year ago was the height of the real estate frenzy, which makes for a difficult comparison. In Vancouver, sales volumes have plummeted 30% over the last year and are facing more challenges with the provincial budget increasing its foreign buyer’s tax and introduction of a vacant home tax announced recently.
In terms of price growth, Toronto leads all markets globally as of September 2017 with the highest inflation-adjusted price growth, while Vancouver falls lower in the ranking but still in the top-10.
Source: UBS, September 2017
This price trend has eased somewhat since the report, with average transaction prices down 10.4% year-over-year in March. The cause, however, offers very little reassurance, with an increasing imbalance of those downsizing from unaffordable single-detached homes (facing skyrocketing property taxes and related costs) into cheaper condos. This effectively creates a “split market” and is particularly evident in Canada’s two hottest markets. Toronto’s detached home prices are down 6.4% in the last year, while condo prices are 14.0% higher over the same period. The imbalance runs even deeper in Vancouver with a 7.3% rise in detached homes far outdone by a 26% price increase in condos in the last year.
Elevated price levels, stricter mortgage rules, higher expected interest rates and provincial intervention combine to create a challenging backdrop for Canadian homeowners. After decades of being a rock-solid investment, times may be changing in the housing market. This moderation in housing is a concern of the Bank of Canada’s and a risk that will be closely monitored. Lower housing investment will also feed into a moderation of GDP over the next couple of years, though this is not a surprise following the strong 3% growth experienced in 2017.