Home Prices Vulnerable to Correction in Multiple Canadian Cities as Values Skyrocket, CMCH Warns
Significant price increases and overvaluation are causing Toronto, Ottawa, Hamilton, Halifax and Moncton’s housing sectors to face “high” levels of vulnerability, while rural areas are heating up the national outlook, says the country’s housing agency. Canada Mortgage and Housing Corp. said on March 25 that these Ontario and Atlantic areas face the greatest risks of market instability, while the national housing sector has a “moderate” level of vulnerability for the second quarter in a row.
The first quarter of the year delivered signs of overheating across the country, but much of that pressure is being driven by cities with high vulnerability and rural areas like Ontario’s cottage country and the Niagara, Bancroft and North Bay regions, said CMHC’s chief economist Bob Duggan. These rural areas don’t receive vulnerability ratings from CMHC because their size makes it difficult to assess trends, but they contribute to the national analysis and have recently become heated. “These are centres that are not the ones that are usually on our radar when we are thinking of price escalation and housing imbalances,” Duggan said during a media briefing.
“We have to keep in mind that much of the recent pressure has occurred in some of these smaller communities and therefore not fully reflected in our assessment today. That assessment assigns low, moderate or high vulnerability ratings every quarter to major cities based on four factors — overheating, price acceleration, overvaluation and excess inventories.
If those factors become imbalanced or risks increase in several areas at once, the agency posits that markets could be more vulnerable to troubles and people could begin struggling with their mortgages. Housing regulators and bodies have been watching the real estate market closely throughout the COVID-19 pandemic because many major cities have seen a lack of inventory but no shortage of buyers during the health crisis.
These conditions have driven up prices in areas like Toronto and Vancouver, but also in rural neighbourhoods, where people are now flocking because they can work remotely and often pay less for a bigger home. Some of these patterns have emerged in Toronto and Halifax, which CMHC moved from moderate to high degrees of vulnerability in the latest quarter as Ontario housing prices increased and Nova Scotia experienced overvaluation.
The Hamilton and Moncton markets were showing a high degree of vulnerability in the prior quarter and held onto that rating as neither market cooled off. Hamilton’s vulnerability was being fuelled by low mortgage rates, which encouraged more first-time buyers to step into the market and pushed existing homeowners to sell and upgrade to more expensive properties. The market also saw people from neighbouring regions flock to the area for more spacious homes.
Meanwhile, Vancouver, Victoria and Montreal maintained their moderate ratings, even as the markets saw a flurry of homes change hands. In Vancouver, the quarterly pace of sales returned to levels not seen since 2017, leading to significant price increases. In Montreal, sales set new records and led to significant price appreciation, putting CMHC on watch for overvaluation imbalances.
Saskatoon, Winnipeg, Regina and St. John’s hold onto the low degrees of vulnerability they previously experienced, but Calgary and Edmonton moved from low to moderate rankings. Calgary’s ratings were fuelled by high levels of excess housing inventory, while Edmonton’s were attributed to overvaluation.
“We are of course watching housing markets across the country very, very closely and carefully,” Finance Minister Chrystia Freeland told reporters in a press conference. “We are very aware, also, of the challenges that many Canadians face — particularly young Canadians — in buying a home,” she said. “So it’s something that we’re looking at carefully.”
Economists from Bank of Montreal and Royal Bank of Canada have called on policy makers to address the frothy market. Diana Petramala, a senior economist at the Centre for Urban Research and Land Development, said one of the best ways to address the hot market would be for regulators to apply mortgage-related restrictions rather than increase interest rates. “If we look at past bubbles, they’ve really been popped by higher interest rates,” she said. If rates go up, that could mean existing homeowners could potentially no longer afford their homes. Mortgage regulations could temper demand for housing without impacting the ability of current homeowners to service their debt.
Statistics Canada Releases Building Permits for February 2021
The total value of building permits issued in February broke the $10 billion mark for the first time, as a jump in the non-residential sector more than offset the decline in the residential sector.
All non-residential components record gains
The non-residential sector jumped 14.2% to $3.3 billion in February with all three components posting gains. Despite the large jump in this sector, the level remained about 13% below the peak reached in April 2019.
Institutional permits saw their largest value increase since June 2020, as the total for this component climbed $226 million to $1.0 billion. With several permits being issued for long-term care facilities and a hospice, Ontario (+44.4%) and Alberta (+107.6%) led the way.
The commercial component increased 11.4% to $1.7 billion, the highest value since September 2020. Most of the gain was the result of high-value permits being issued for additions and renovations to commercial buildings in Ontario and Alberta. Building intentions in the commercial component have not been this high in Alberta since December 2019.
Municipalities issued permits worth $544 million for industrial buildings in February, up 1.9% from the previous month. Seven provinces recorded a rise in this component, led by Ontario.
Residential gains in British Columbia not enough to offset declines in Ontario and Alberta
Residential construction intentions decreased 2.9% to $6.8 billion in February, following a record month in January. In British Columbia, several high-value permits were issued for multi-family dwellings (+59.2%), including two for the University District condo development in the city of Surrey. However, declines in six provinces, including Ontario (-23.9%) and Alberta (-39.2%), pulled this component lower at the national level, with the total dropping 4.9% to $3.3 billion.
Building permits for single-family homes dipped 1.0% to $3.5 billion, although they remained at historically high levels, with Ontario ($1.5 billion) and Prince Edward Island ($29.1 million) reporting record highs. This marked the third consecutive month of record-setting numbers for Ontario, while the building permits in Prince Edward Island were close to double the values typically observed prior to the pandemic.
From January 2018 to the end of 2020, the value for multi-family dwellings had exceeded that of single-family homes. However, shortly after the start of the pandemic, the gap between these two components steadily closed. By January 2021, the value of permits for single-family homes had once again surpassed that of multi-family dwellings and continued to do so in February.
Source: Statistics Canada
Record-High Lumber Prices Add as Much as $30k to the Cost of Building a House
As if Canada’s housing sector wasn’t already irrational enough, a pandemic-induced lumber shortage is pushing the price of building a home even higher. The cost of basic lumber like two-by-fours has doubled since 2018. “[That adds] tens of thousands of dollars depending on the size of your home,” said Kevin Lee, CEO of the Canadian Home Builders Association.
When the pandemic hit, lumber mills were forced to close. Then, a nation of people stuck at home started building more decks and fences. People renovated to accommodate their new work-from-home lives. And that’s left mills scrambling to get logs, lumber yards short on supply, and contractors forced to pay more for what supply is available.
Cost of materials double or more
Home builders buy two-by-fours in bulk. A thousand board feet cost $550 before COVID-19 hit. Now, the same amount costs more than $1,400, said Lee. “A typical, say, 2,500 sq. ft. home, you’re over $30,000 in additional costs for lumber.” He says a smaller, town-home style of building would cost an additional “$10,000 or more just in lumber alone.”
Contractors are finding themselves stuck in the middle. Dave Kenney, co-owner of Bro-laws contracting, had a client looking to build a deck and a new fence pre-pandemic, but the project was delayed. He punched the updated costs into a spreadsheet and was shocked at how much the costs had risen. “It blew my mind,” said Kenney. “It was literally double the amount … just in materials.”
But with supply so low, contractors don’t have many options. At Century Mill Lumber, general manager, Chris Black spends more time on the phone trying to find material than he does in the yard working with his clients. Sometimes, he simply can’t find the lumber his clients need no matter where he looks. “I’m not able to deliver like I was before,” he said. “As a business owner you never want your customers to go to another guy, because they may not come back.”
Here’s the really hard part: no one knows how or when things will get back to normal. Demand has fundamentally changed over the course of the pandemic and that’s causing major disruptions in the supply of everything from microchips to wood to houses.
The already over-heated housing sector saw a shift in demand: people left condos for houses, they left small houses for bigger homes with more space, and they left the city for smaller towns in search of a bargain. This isn’t just a Canadian phenomenon; it’s happening across the U.S. too. Federal Reserve Chair Jerome Powell says the best cure for supply crunches and high prices is time. “It’s very possible … that you will see bottlenecks emerge and then clear over time,” he said. “These are not permanent. It’s not like the supply side will be unable to adapt to these things. It will — the market will clear. It just may take some time.”
In normal times, an increase in home renovations and a spike in DIY projects would make Black a very happy man. But the last year has been stressful. He’s spent the last two-and-a-half years building up his business and nurturing client relationships. Any time he says he can’t deliver, he looks around at the staff he has and worries even more. On one hand, Black says the lumber shortage shows how delicate the global supply chain is. On the other hand, he says this shortage is just about human behaviour — which he expects to change again, once the pandemic loses its grip. “I do think that once COVID kind of settles, I think you will see people travel again. I think you will see people spending money on things they used to spend money on.”