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.

Country1) 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) (%))
Canada5912592
New Zealand6111286
Australia618272
Sweden518267
Norway367355
United Kingdom294838
Ireland174028
France233127
Denmark183426
Spain193226
Netherlands251520
United States-5103
Switzerland-163
Italy-6-8-7
Germany-13-9-11
Greece-10-13-12
Korea-415-18
Japan-28-18-23

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.

Commentaries contained herein are provided as a general source of information based on information available as of April 16, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI is registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

Written by

Mike Archibald, CFA, CMT, CAIA

Associate Portfolio Manager

AGF Investments Inc.

More articles like this.

Tempered tantrum: Why emerging markets are better positioned this time around

The current underperformance in emerging markets should prove less painful than the Taper Tantrum of 2013, particularly for investors who shy away from countries with higher current account deficits.

Read More

Noise and robots in the world of trading

High frequency traders and robots have had a growing influence on the industry in recent…

Read More

Japan ends its streak of economic growth

AGF Weekly Perspectives “A recap of last week’s top economic news and what’s to come”…

Read More