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Canada Housing Market Outlook: More Moderation, No Hard Landing

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Canada Housing Market Outlook: More Moderation, No Hard Landing ANALYSIS Canada Housing Market Outlook: More Moderation, No Hard Landing Prepared by Introduction Andres Carbacho-Burgos [email protected] Economist There has been a lot of speculation about Canada’s housing markets overheating during the past two years. However, the Moody’s Analytics forecast model for the Brookfield RPS house Contact Us price indexes indicates that overall house price growth in Canada will slow down as some markets, especially Toronto and Vancouver, become overvalued and less affordable while Email international capital inflows also slow down. In coming years, the Bank of Canada will raise [email protected] interest rates in reaction to monetary tightening in the U.S., which will pull up on Canadian U.S./Canada mortgage rates. The house price outlook calls for a deceleration of house price growth, not for +1.866.275.3266 a serious decline, though there are exceptions for smaller regions. Of the six major Canadian EMEA metro areas, only Edmonton will experience a slight house price decline in coming years, +44.20.7772.5454 (London) while the other five metro areas will have slow to moderate house price growth. +420.224.222.929 (Prague) Asia/Pacific +852.3551.3077 All Others +1.610.235.5299 Web www.economy.com www.moodysanalytics.com MOODY’S ANALYTICS Canada Housing Market Outlook: More Moderation, No Hard Landing BY ANDRES CARBACHO-BURGOS he Canadian housing market has experienced a radical regional divergence over the past two years, but some basic laws of gravitation, and at least one policy intervention, point to regional convergence T reasserting itself without any sort of hard landing. In particular, some of the largest house price imbalances are the result of international wealth inflows rather than excessive risk-taking by mortgage lenders, so there is little systemic financial risk. More than most countries, Canada dis- inventory-to-sales ratio has fallen to a cycli- pull is because of wealth inflows, often of plays substantial regional concentration of cal low of only 4.6 months of sales. Residen- foreign origin, that cannot be fully measured industries, and there is also a wide variety of tial construction has been flat over the past by macroeconomic data, and also because of demographic profiles across the country. As year at 200,000 annualized starts, and is still relatively strong demographics. By contrast, a result, there may still be individual regions below the average of 225,000 from before the fall in the price of oil at the end of 2014 within Canada where housing markets per- last decade’s recession. short-circuited what was previously moder- form poorly in coming years, but the baseline These economic statistics point to a tight ate residential price growth in Calgary and forecast is for no overall national house housing market, but differences in regional Edmonton. This loss of house price momen- price correction. economic performance have led to greatly tum is likely to persist even after the price of different rates of demand growth between oil starts to recover. Recent Performance metro areas. The combination of different Some degree of economic or demo- National metrics show signs of the Cana- regional rates of capital inflows, substan- graphic weakness has dragged on demand in dian housing market overheating, which will tially different demographic patterns, and other provinces in Canada and pulled down add to price pressure in the very short term. the drastic fall in oil prices at the start of house price growth below the national rate Sooner or later, however, this market tight- last year has driven a wedge between house over the past three years. For the Atlantic ness may already be leading to a slowdown prices in different provinces and metro areas. Provinces, a large part of this weakness is in price growth as housing in the largest Of the largest metro metro areas becomes less affordable, pos- areas, Toronto and Chart 1: Toronto and Vancouver Break Away sibly also as residential construction starts Vancouver show the Brookfield RPS composite house prices, Jan 2010=100, SA to ramp up. In the case of Vancouver, the clearest upward diver- 175 Toronto dizzying run-up in house prices over the past gence over the past 165 Montreal year has also prompted the imposition of three years (see Chart 155 Vancouver a transfer tax on foreign purchases (effec- 1), but this divergence Calgary 145 Edmonton tive as of August 2016) intended to reduce has also started ex- 135 Canada 13-metro composite total demand. tending to smaller 125 As of July, national home sales are slightly nearby metro areas more than 530,000 annualized units, down such as Abbotsford, 115 from a peak of more than 550,000 units in Hamilton and Os- 105 the second quarter, according to the Canadi- hawa. For Toronto and 95 an Real Estate Association. By contrast, total Vancouver, a large 10 11 12 13 14 15 16 listings are at a cyclical bottom, so that the part of the upward Sources: Brookfield RPS, Moody’s Analytics 11 1 OCTOBER 2016 MOODY’S ANALYTICS Chart 2: Inflation, New-Home Prices Are Subdued are unchanged in Though the national unemployment Canada macroeconomic indicators, % change yr ago the forecast model rate pushed up past 7.2% in the wake of last 12 using Brookfield year’s oil price shock, it has already started New-home and land price index 10 RPS house price to decrease in the second quarter and con- 8 indexes, house tinued to do so as the Brent oil price starts Per capita disposable income 6 prices will trend to recover to a more normal trend, restart- upward at the ing oil production and restoring momentum 4 rate of consumer in Alberta’s economy. Finally, multifamily 2 price inflation. construction will decline over the next few 0 Deflator, private By comparison, years given that recent new construction has consumption -2 per capita dispos- pushed rental vacancy rates closer to normal -4 able income and in Toronto and Vancouver, but single-family 05 06 07 08 09 10 11 12 13 14 15 16 the new-home and homebuilding will hold steady in large part Sources: Statistics Canada, Moody’s Analytics land value price thanks to already-high prices in both metro 22 index are more areas and because of the start of recovery in demographic: New Brunswick and Nova volatile as seen in the past decade, but over the country’s oil belt. Scotia had slight population declines in the last five years they have been relatively The forecast for housing-related mac- 2013-2014, as did Newfoundland in 2015. By stable and are likely to remain so in the me- roeconomic fundamentals that are sensi- contrast, an improvement in the economy, dium term (see Chart 2). tive to the business cycle is summarized in led by increased trade and tourism, helped Within a five-year horizon, per capita dis- Table 1. While total housing starts fall in the house price appreciation in Quebec pick up posable income growth will initially sputter medium term, reduced apartment construc- after 2013, though it still lagged the national because of low oil and agricultural commod- tion accounts for all of the decline. Income growth rate. Last, Manitoba and Saskatch- ity prices, but once these start to recover, growth will be sufficient so that affordability, ewan in the past three years have been hit by real per capita disposable income will reach as measured by the ratio of median house falling agricultural prices as well as declining a non-business cycle trend growth rate of prices to median family income, will stabilize oil prices; not surprisingly, their slower medi- about 1% per year. by 2018. Last, there will be a slight increase an income growth has translated into slower The forecast for the new-home and land in the debt burden, as measured by the ratio residential price gains as well. value price index is less sanguine. Moody’s of mortgage credit to disposable income, but The concentration of demand growth Analytics assumes that as economic recover- there have been no indications at any point in the largest metro areas of Toronto and ies in Asia and Europe start to gather pace, of a mortgage lending bubble building up. In Vancouver has also led to space being at a capital inflows to the U.S. and Canada will addition to the absence of any sort of bank premium, especially in areas where detached diminish at the same time that there is a deregulation, the percentage of mortgages home construction is restricted by zoning pullback from new-house and land purchases in arrears is at a business cycle low, while the regulations or elevated land prices. Conse- in Toronto and Vancouver as affordability ratio of total consumer debt service to dis- quently, house price growth has been stron- starts to deteriorate for all but the highest- posable income has fallen steadily over the ger than condo apartment price growth since income earners. As a result, new-home and past decade. 2010, and is likely to remain so as long as land value price growth will likely lag con- wealth inflows focus on these two large met- sumer price inflation. The valuation question ro areas. However, Vancouver’s new transfer Combining the three forecasts leads to For individual Canadian metro areas, tax already seems to be slowing single-fami- a five-year trend residential price growth Moody’s Analytics calculates long-term ly home sales and house price growth. rate of slightly less than 3%, or slightly less trend house prices in a manner similar to the than 1% after adjusting for consumer price national house price, and in that case region- The macroeconomic forecast inflation.
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