The Canadian housing market continues to defy the odds and has regained some momentum when several industry experts predicted a severe cooling was in the cards. Last summer when the federal government implemented its fourth round of tightening to mortgage lending standards since 2008, it was widely believed that this would be the catalyst to topple a market that had become overheated as a result of the current low rate environment. But instead of toppling, the market has stabilized and is once again starting to flex its muscles.
As a result of this resilience, Ottawa has recently implemented additional new measures to try and reign in the market once again. The latest move sees the CMHC limiting guarantees it offers banks and other lenders on mortgage-backed securities. In doing so, the Crown corporation has notified banks, credit unions and other mortgage lenders that they will be restricted to a maximum of $350-million of new guarantees monthly under its NHA MBS program. In addition to removing fuel from the housing market and adding upward pressure to mortgage rates, the move forces banks and other lenders to take on more of the risk of mortgage defaults, rather than offloading that risk to Ottawa and the Canadian taxpayer.
CMHC was in a position to guarantee a maximum of $85-billion worth of new NHA MBS this year, but by the end of July, lenders had already issued $65-billion worth of securities. There was a total of $76-billion issued during all of 2012.
Canadian home sales, which have staged a bit of a recovery in recent months, saw sales little changed on a month-over-month basis in July as they edged up just two-tenths of a percentage point. The number of local markets where sales improved on a month-over-month basis ran roughly even with those where activity edged back in July. Larger gains in Greater Toronto and Greater Vancouver tipped the balance, resulting in the small increase at the national level.
Actual sales activity is 9.4% ahead of levels reported in July 2012, as sales were up in three of every five local markets. Vancouver, Calgary, Edmonton and Toronto lead the way with double digit gains, but it should be pointed out that the gains in Vancouver and Toronto reflect sales trends that were already weakening at this time last year.
Some 284,865 homes have traded hands across the country so far this year which is 4.6% below levels in the first seven months of 2012.
The actual national price for home sold in July was $382,373 which represented an 8.4% increase from the same month last year. Recent improvement in more expensive markets that had slowed at this time one year ago contributed to the national average gain in July. It is interesting to note however, that if Greater Toronto and Greater Vancouver are removed from the national average price calculation, the increase is cut almost in half.
A better gauge of what’s going on with prices is the MLS Home Price Index, which is not affected by changes in the mix of sales the way that average price is. The index shows year-over-year price growth stabilizing between two and three per cent as seen in the chart below.
After a stellar July in the GTA where sales represented the best July results since 2009 and the third best July result on record, August results were just as impressive. In August, there were a total of 7,569 transactions through the MLS system which represented a 21 per cent increase compared to one year earlier.
Although resale activity is down over the first seven months with a 2.41% decline compared with the first seven months of 2012, we have seen a 2.41% increase during the last five months. These increasing numbers are an indication that home buyers are still finding affordable home ownership options in the GTA, and many households who put their decision on hold to purchase a home last summer have reactivated their search.
All major home types experienced strong sales in August compared to last year with the detached market leading the way with a 24.2% increase.
Reflecting tighter mortgage conditions, the average selling price for August sales was up on a year-over-year basis by 5.4% to $503,094. The low-rise market segment continued to be the driver of overall price growth as semi-detached homes sold for 5.8% more and detached homes for 4.9% more. Year-to-date, average prices are up 4.3% across all major home types. These price appreciations came despite an increase in borrowing costs during the spring and summer months as average price homes remained affordable for households earning an average income. With this in mind, the Toronto Real Estate Board is predicting that tight market conditions will promote continued price growth throughout the remainder of 2013.
Months on inventory for low-rise homes remains near record lows at 2.1 months suggesting that sellers’ market conditions will remain in place for the last four months of 2013. New listings have decreased in each of the last three months amongst detached and semi-detached homes helping to keep inventory numbers in check. Inventory amongst high-rise apartment condos has levelled off, and is currently at 3.6 months. The national inventory number is currently at 6.1 months.
Existing home sales in Ontario posted the fastest growth in over two years during the second quarter as improving consumer sentiment supported by better Ontario job prospects, and the fading effects of new mortgage rules strengthened housing demand. The growth in home sales was broad based with most major markets posting increases. Despite these increases, sales were still 7% below the numbers recorded during in the first six months of 2012. A total of 65,022 homes were sold during the second quarter representing over a 65% increase from the first quarter of 2013 and a 2.2% decline from the same period one year earlier. Thunder Bay remained the hottest market during the quarter followed closely by Brantford. The GTA and eastern Ontario regions were the coolest.
Ontario’s housing market which has remained firmly in a balanced market state for over the past three years, saw home prices grow in excess of inflation for the second consecutive quarter. This phenomenon suggests that the mix of home sales continues to favour higher priced singles and semis. While home prices reached a high during the spring of 2012, those levels were eclipsed in the latest quarter. Ontario’s tightest resale markets, posted the strongest price gains during the second quarter with Thunder Bay and Hamilton leading the way. For the quarter, average prices climbed to $398,680 which represented a 3% increase from the second quarter of 2012. Year-to date, average prices are up 2.9% to $404,809.
For the first time in over a year, Ontario residential construction moved higher during the second quarter. Multi family home construction which includes semis, rows and apartments grew fastest while construction amongst singles remained steady. Rising home prices and tight resale market conditions for low density resale housing supported second quarter starts activity in the multi-family home sector. Residential home construction has declined most in Kitchener, Oshawa, Greater Sudbury and Toronto while holding up better in Barrie, Thunder Bay and Guelph. While multi-family home construction propelled starts in the latest quarter, for the year as a whole, total starts are down 29%.
Single detached home construction which remained more stable during the quarter saw new home inventories drift lower thanks in large part to limited land available for this type of construction. Demographic trends over time also suggest that an aging population and smaller households are less supportive of new detached construction.
The changing cost of home ownership is a critical factor that impacts first time buying activity. The cost of home ownership can be measured in many ways for the average home buyer. One way is to track the gap between actual income earned versus the required income to purchase an average resale home over time. When the gap is narrowing housing is more expensive, when growing it reflects the reverse. A number of Ontario major markets have become more expensive in recent years. Toronto, Hamilton and Kitchener saw the gap between actual and required income narrow the most, while the gap remained more stable in Guelph, St. Catharines-Niagra and Brantford. Windsor, which has seen stable readings in affordability in recent years, is considered the least expensive market in Canada.
Source: CREA, CMHC, Bank of Canada
Source: CREA, CMHC, Bank of Canada
Since our last report, Stephen Poloz has taken over as Governor of the Bank of Canada from Mark Carney. On September 4, 2013, Poloz announced that the Bank of Canada would leave the overnight lending rate at 1%, where it has been since September 2010.
The Bank maintained its forecast for economic growth of 1.8% in 2013 and 2.7% in 2014 and 2015. However, they noted that uncertain global economic conditions have resulted in exports and business investment not yet generating as much growth as expected and the economy continues to be driven by consumer spending.
These factors, coupled with the fact that inflation is trending well below its 2% target, makes it very unlikely that interest rates would rise in the next 12 months. Given that the US Fed has helped move mortgage interest rates up (more on this below), it is likely that the Bank of Canada will have very little incentive to increase the overnight rate.
Mortgage interest rates remain extremely low by historical standards, but have been on the uptrend both in the US and Canada since May following the US Federal Reserve’s announcement that they will soon begin to taper their stimulus package by reducing their purchases of Treasury and mortgage bonds. Mortgage rates depend on both the Bank of Canada rate, which the government controls, but also the market rate for government bonds. Following the Fed’s announcement, the market rate portion has increased, causing mortgage rates to increase as well. This has indeed resulted in buyers accelerating their purchase timeline to take advantage of rates before they go up.
There are a number of mitigating factors that reduce the impact of this rate rise on homeowners. One is that Canadian banks qualify people for a mortgage based on the “posted rate” vs the best rate that the client will actually get. For example, on the day of writing, the posted rate is 5.34% vs “special” rate of 3.89%, or a 1.45% difference. The monthly payment difference is $243.11 and using the industry’s typical qualification standards would equate to roughly an extra $7,890 a year of income required to qualify. It also means that a typical family can actually afford a mortgage that is roughly 1.50% higher than what they receive, providing a significant cushion to the market. CMHC expects average mortgage rates to rise less than 0.50% in 2014.
We are a leading institutional lender offering a competitive line of mortgage products to help consumers achieve their dreams of home ownership and financial freedom.
We work exclusively through a select group of mortgage brokers who will assist you in your application process and to ensure you receive excellent customer service.