CANADIAN HOUSING HEALTH CHECK Adjusting to policy measures in Ontario keeps near-term housing risks elevated in Canada Local housing risk indicators still show unusually high risks and vulnerabilities in Toronto and other southern Ontario markets but the recent easing of upward price pressure has been a positive development. Risk profiles in other markets generally continued to improve. Nation-wide, the probability of a steep and widespread housing downturn in Canada over the next 12 months remains low, although it has increased slightly because of the potential for overreaction to policy action in Ontario and for further policy tightening. Housing policy: Reaction to Ontario’s Fair Housing Plan announced on April 20 has been swift. Home resales have dropped sharply and listings have surged in the Great- er Toronto Area. The plan appears to be having some success at reining in price ex- pectations for both buyers and sellers in the area, although the process of adjustment has yet to run its course fully. Tax on foreign buyers in Vancouver: The Vancouver market has adjusted in an orderly fashion to the 15% tax on home purchased by foreign nationals. Its dampen- ing effect on homebuyer demand may be waning, however. Escalating prices in Canada’s hot markets: Affordability-related vulnerabilities remain high in Toronto (where they continued to increase recently) and Vancouver (where they have decreased modestly since the fall). Interest rates: Interest rate risks are still contained but have increased recently. The Bank of Canada raised its overnight rate by 25 basis points in early July and signaled that there may be more to come. The news sparked a run-up in bond yields. While we expect yields to drift higher, the odds of a spike in rates are low in the short term. Energy sector downturn: Oil prices’ renewed softness in recent months has turned the focus on this risk factor again in oil-producing provinces. Any further decline in oil prices could jeopardize the burgeoning recovery in Alberta’s housing market. Unemployment: Labour market-related risks have generally continued to ease. In particular, there was notable improvement in Alberta where the unemployment rate has declines markedly from decade-high levels late last year. July 2017 Largest four housing markets Toronto — Elevated risks and vulnera- bilities persist while the market transi- tions toward a cooler state in the wake of policy action. Prices are likely to decline m/m for a period of time. Sharp shifts in market psychology al- ways raise the odds of overreaction. But slower home resale activity and increased supply of homes for sale have been positive developments. Montreal — Upward momentum con- tinued to build so far in 2017. Sales are growing and inventories declining. Prices have picked up their pace but still within very reasonable range, although affordability is starting to become a little stretched. The mar- ket’s risk profile is quite positive over- all at this point. Vancouver — Despite further improve- ments this year, extremely poor af- fordability is still a major vulnerabil- ity. Policy measures to address hous- ing risks have contributed to cooling the market down, although the effect of these measures may be waning. The recent tightening of demand-supply conditions has dimmed the risk of a sharp price decline in the near term. Calgary — Growing signs of an eco- nomic recovery have improved the risk profile. High condo and rental invento- ries are still sources of concerns. The recent softening in oil prices also rais- es risks. A drop in condo construction and an improving trend for home re- sales have been positive develop- ments. Canada Vancouver Calgary Toronto Montreal Affordability Resale market balance Rental market balance Interest rates Labour market Demographics New home inventory - singles New home inventory - multiples Homes under construction - singles Homes under construction - multiples Significantly outside historical norms and posing much higher risk than usual Modestly outside historical norms and posing moderately higher risk than usual Within historical norms or not posing any immediate threat Monitoring dashboard Craig Wright Chief Economist (416) 974-7457 [email protected]Robert Hogue Senior Economist 416-974-6192 [email protected]
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CANADIAN HOUSING HEALTH CHECK Monitoring dashboard · July 2017 Largest four housing markets Toronto — Elevated risks and vulnera-bilities persist while the market transi-tions
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CANADIAN HOUSING HEALTH CHECK
Adjusting to policy measures in Ontario keeps near-term
housing risks elevated in Canada
Local housing risk indicators still show unusually high risks and vulnerabilities in
Toronto and other southern Ontario markets but the recent easing of upward price pressure has been a positive development. Risk profiles in other markets generally
continued to improve.
Nation-wide, the probability of a steep and widespread housing downturn in Canada
over the next 12 months remains low, although it has increased slightly because of the
potential for overreaction to policy action in Ontario and for further policy tightening.
Housing policy: Reaction to Ontario’s Fair Housing Plan announced on April 20 has
been swift. Home resales have dropped sharply and listings have surged in the Great-
er Toronto Area. The plan appears to be having some success at reining in price ex-
pectations for both buyers and sellers in the area, although the process of adjustment
has yet to run its course fully.
Tax on foreign buyers in Vancouver: The Vancouver market has adjusted in an
orderly fashion to the 15% tax on home purchased by foreign nationals. Its dampen-
ing effect on homebuyer demand may be waning, however.
Escalating prices in Canada’s hot markets: Affordability-related vulnerabilities
remain high in Toronto (where they continued to increase recently) and Vancouver
(where they have decreased modestly since the fall).
Interest rates: Interest rate risks are still contained but have increased recently. The
Bank of Canada raised its overnight rate by 25 basis points in early July and signaled
that there may be more to come. The news sparked a run-up in bond yields. While we
expect yields to drift higher, the odds of a spike in rates are low in the short term.
Energy sector downturn: Oil prices’ renewed softness in recent months has turned
the focus on this risk factor again in oil-producing provinces. Any further decline in
oil prices could jeopardize the burgeoning recovery in Alberta’s housing market.
Unemployment: Labour market-related risks have generally continued to ease. In
particular, there was notable improvement in Alberta where the unemployment rate
has declines markedly from decade-high levels late last year.
July 2017
Largest four housing markets
Toronto — Elevated risks and vulnera-
bilities persist while the market transi-
tions toward a cooler state in the
wake of policy action. Prices are likely
to decline m/m for a period of time.
Sharp shifts in market psychology al-
ways raise the odds of overreaction.
But slower home resale activity and
increased supply of homes for sale
have been positive developments.
Montreal — Upward momentum con-
tinued to build so far in 2017. Sales
are growing and inventories declining.
Prices have picked up their pace but
still within very reasonable range,
although affordability is starting to
become a little stretched. The mar-
ket’s risk profile is quite positive over-
all at this point.
Vancouver — Despite further improve-
ments this year, extremely poor af-
fordability is still a major vulnerabil-
ity. Policy measures to address hous-
ing risks have contributed to cooling
the market down, although the effect
of these measures may be waning. The
recent tightening of demand-supply
conditions has dimmed the risk of a
sharp price decline in the near term.
Calgary — Growing signs of an eco-
nomic recovery have improved the risk
profile. High condo and rental invento-
ries are still sources of concerns. The
recent softening in oil prices also rais-
es risks. A drop in condo construction
and an improving trend for home re-
sales have been positive develop-
ments.
Canada Vancouver Calgary Toronto Montreal
Affordability
Resale market balance
Rental market balance
Interest rates
Labour market
Demographics
New home inventory - singles
New home inventory - multiples
Homes under construction - singles
Homes under construction - multiples
Significantly outside historical norms and posing much higher risk than usual
Modestly outside historical norms and posing moderately higher risk than usual
Within historical norms or not posing any immediate threat
Canadian Housing Health Check provides RBC Economics’ assessment of key indicators of Canada’s housing market that are
deemed to offer early warning of potential imbalances. This monitoring exercise is one of the tools used regularly by RBC Econom-
ics to follow developments in this important sector of the Canadian economy. The report focuses on indicators that have been closely
correlated (leading or coincident) with housing downturns and significant home price declines during housing cycles in the past three
decades or so. While we believe that housing affordability and the sales-to-new listings ratio (and months’ inventory) are the best
indicators of market stress and price pressure, respectively, no single indicator provides perfect and accurate early warning signals of
impending trouble. Accordingly, Canadian Housing Health Check emphasizes a ‘dashboard’ approach to convey the point that trou-ble in the housing market can arise from many directions and that it is imperative to monitor the situation broadly. This approach is
complemented by a detailed review of individual indicators that includes a graphical depiction of the current situation within a his-
torical context and a brief discussion of the rationale of our assessment.
About the graphics and risk ‘zone’ system The dashboard graphics display the current values of the indicators (dark blue bar) within zones that we consider safe (green), con-
cerning (yellow) or dangerous (red). The width of each graphics represents the range of values posted by the indicator during the past
30 years (or period of time available). The far left corresponds to the safest measure ever recorded and the far right, to the most ex-
treme imbalance reached historically. For most indicators, the left corresponds to low values but for some (sales-to-new listings ratio
and net immigration) to high values.
The yellow and red zones appearing in dashboard graphics and individual indicator charts generally were determined by analyzing past housing downturns and constitute our estimations of thresholds above (or, in some cases, below) which market imbalances and
significant home price declines occurred at the national level in Canada. The yellow zone comprises a range of values that, histori-
cally, have been mostly associated with imbalances but not always with housing downturns (i.e. sustained price declines). In other
words, these values give somewhat ambiguous and sometimes ‘false’ signals. The red zone, however, comprises values that repre-
sent imbalances much more clearly and of larger magnitude. An indicator in the red zone should be considered a source of worry.
The farther to the right in the red zone in the dashboard graphics are the values, the more extreme is the imbalance, the more intense
is the stress exerted on the market and, ultimately, the more severe the potential correction.
The specific rules at the national level are as follows:
RBC Affordability Measure for the aggregate of all housing types: yellow threshold = 41.5% (0.3 standard deviations above
the long-term mean); and red at 45.1% (1.0 standard deviations above the mean).
Sales-to-new listings ratio: yellow threshold = 0.40; and red = 0.35.
Months of inventory: yellow threshold = 7.0; red = 8.5.
Rental vacancy rate: yellow threshold = 3.2% (long-term mean); and red = 3.7% (0.5 standard deviations above the mean).
Real 5-year bond yield relative to trailing 12-month average: yellow threshold = 1.0 percentage point (1 standard deviation
above the mean); red = 2.0 percentage points (2 standard deviations).
Unemployment rate relative to trailing 12-month average: yellow threshold = 0.41 percentage points (0.6 standard deviation
above the mean); red = 0.9 percentage points (1.5 standard deviations).
Net immigration per 1,000 population: yellow threshold = 6.5 (0.5 standard deviations above the mean); red = 5.0 (0.4 stand-
ard deviations below the mean).
Completed and unoccupied units per 1,000 population, singles and semis: yellow threshold = 0.29 (0.3 standard deviations
above the mean); red = 0.36 (1.3 standard deviation above the mean).
Completed and unoccupied units per 1,000 population, multiples: yellow threshold = 0.36 (the mean); red = 0.47 (0.9 stand-
ard deviation above the mean).
Housing under construction per 1,000 population, singles: yellow threshold = 2.11 (0.5 standard deviations from the mean);
red = 2.33 (1 standard deviation from the mean).
Housing under construction per 1,000 population, multiples: yellow threshold = 3.93 (0.5 standard deviations from the
mean); red = 4.58 (1 standard deviation from the mean).
The areas shaded in grey in the indicator charts correspond to housing downturns – i.e., periods during which home prices (as de-
fined as average prices of homes sold on the MLS system) fell by more than 5% from monthly peak to trough. It is important to note
that the precise timing of these downturns can vary depending on the home price measure used. The grey shaded areas, therefore,
should be seen as broad guidelines.
CANADIAN HOUSING HEALTH CHECK | JULY 2017
3
CANADA
Affordability
Near-term: neutral
Medium-term: negative
Existing home market balance
Near-term: positive
Medium-term: negative
Near-term: positive
Medium-term: negative
Near-term: positive
Medium-term: positive
Demand fundamentals
Near-term: neutral
Medium-term: neutral
Near-term: positive
Medium-term: positive
Near-term: positive
Medium-term: positive
Supply fundamentals
Near-term: positive
Medium-term: positive
Near-term: positive
Medium-term: positive
Near-term: positive
Medium-term: positive
Near-term: positive
Medium-term: negative
Risk implications
RBC affordability measure- aggregate
Low High
Sales-to-new listings ratio
LowHigh
Months of inventory
Low High
Change in real 5-Year bond yields
Low High
Low High
Housing under construction per capita - singles
Low High
YellowHousing under construction per capita - multiples
Low High
Yellow
Rental vacancy rate
Change in the unemployment rate
Low High
Yellow
LowHigh
Yellow
Net immigration rate
Low High
YellowCompleted and unsold units per capita - singles and semis
%, total CMAs, purpose-built apartment buildings of three units or more, Canada The rental vacancy rate has not correlated very closely with prices historical-
ly. However, we believe that the Canadian housing story will be very sensi-
tive to the supply of new units into the marketplace, much of which (almost
entirely condos) will be directed toward the rental market. Therefore, this
gauge of market absorption in the rental segment should be monitored close-
ly.
A main drawback of the vacancy rate as a monitoring tool is that it is pub-
lished only once a year (in October) by CMHC.
The latest data for October 2016 shows further marginal increase from
3.3% in October 2015 to 3.4% at the national level, which slightly ex-
ceeds the long-term average (3.0%). The rise since 2014 primarily reflect-
ed large increases in Alberta and Saskatchewan.
We would consider a vacancy rate above 3.5% as a sign of oversupply in the
After reaching very high levels in 2014 and 2015, there has been a sharp
drop in the number of units under construction moderation on the multi-
unit side of the market in 2016. Much of the wave of condo starts in 2014
has now exited the construction ‘pipeline’.
Current levels therefore signal a return to a more subdued pace of condo
completions in the period ahead, which is good news considering the
state of oversupply at present in this segment of the market.
Sharp drops in condo apartment starts in 2015 (down 15%) and 2016
(down 36%) suggest that further moderation is likely ahead.
The material contained in this report is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, without express authoriza-
tion of the copyright holder in writing. The statements and statistics contained herein have been prepared by RBC Economics Research based on information from
sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This publication is for the infor-
mation of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.