CREA: Housing Activity Forecast to Continue Easing Over the Second Half of 2021 and Into 2022

The Canadian Real Estate Association (CREA) has updated its forecast for home sales activity via the Multiple Listing Service® (MLS®) Systems of Canadian real estate boards and associations. Over the past several years, record levels of international immigration (not including 2020), low interest rates, and an increasingly middle-aged Millennial cohort have combined to fuel very strong household formation and housing demand in Canada. Recall that prior to COVID-19, the number of available listings nationally was already at a 14-year low and the national number of months of inventory on the eve of the lockdowns had fallen to below 4 months (seller’s market territory).

COVID-19 supercharged trends that were already present, with even stronger first-time home buying activity teaming up with a surge in existing owners choosing to pull up stakes and move to find the right place to ride out the pandemic. This served to drive prices sharply higher while supply fell further to reach all-time lows. That said, with vaccination now well underway, the urgency with which so many sought out housing over the last year appears to be fading and the market is settling down, albeit from a very high starting point.

The mass vaccination of society and reopening of our lives and economies along with the associated migration and international immigration introduce a considerable amount of uncertainty to the outlook over the balance of 2021 and into 2022. Still, it is hard to see how these factors will not act as tailwinds to both housing demand and prices, particularly as inventories are still stuck at record lows.

Current trends and the outlook for housing market fundamentals suggest activity will remain strong through 2021, resulting in a record number of sales this year despite the slowdown that began in April. Over time, activity is forecast to continue returning towards more typical levels. As a result, 2022 is expected to see significantly fewer MLS® transactions than in 2021 while nonetheless still marking the second-best year on record.

Some 682,900 properties are forecast to trade hands via Canadian MLS® systems in 2021. This would be a record-setting result, and an increase of 23.8% over 2020. The strength of demand in 2021 has been geographically broad-based and CREA anticipates double-digit sales growth in every province with the exception of Quebec, where the second half of 2020 was comparatively stronger than the first five months of 2021.

The national average home price is forecast to rise by 19.3% on an annual basis to just over $677,775 in 2021. This reflects the current unprecedented imbalance of supply and demand, currently close to 2 months of inventory nationally. While market conditions have eased a little in recent months, they nonetheless continue to favour sellers to some extent in virtually all local markets.

On a monthly and quarterly basis, sales are forecast to continue trending back towards more typical levels through the latter half of 2021 and into 2022. Limited supply and higher prices are expected to tap the brakes on activity in 2022 compared to 2021, although increased churn in resale markets resulting from the COVID-related shake-up to so many people’s lives may continue to boost activity above what was normal before COVID-19. Indeed, it is possible that many of the moves associated with changes related to remote work won’t play out until further down the road when we have more certainty about what the future will look like post-COVID.

National home sales are forecast to fall by 13% to around 594,000 units in 2022. This easing trend is expected to play out across Canada with buyers facing both higher prices and a lack of available supply, while at the same time the urgency to purchase a home base to ride out the pandemic continues to fade alongside the virus itself.

Sales declines are forecast to be largest in B.C. and Ontario, resulting in a “Simpson’s Paradox” in the average price whereby every province is forecast to post a larger year-over-year increase than the one at the national level due to the compositional shift in sales away from the most expensive provincial markets. The national average price is forecast to edge up by just 0.6% to $681,500 in 2022.

Source: CREA


Investors Account for a Fifth of Home Purchases in Canada. Are They Driving Up Housing Prices in a Booming Market?

Investors account for one-fifth of all home purchases in Canada, adding more fuel to the debate about their influence on the country’s soaring real estate prices and demand for housing. Since the start of the COVID-19 pandemic, investor buying has rebounded to 20.1% of all purchases in the country, with a slightly higher share in Toronto and Hamilton, according to data published in the Bank of Canada’s financial system review. 

With the Canadian Real Estate Association (CREA) reporting the national average home price is 38% higher than a year ago, real estate investors are being accused of driving up prices. However, housing experts and economists have not been able to quantify the investor effect on pricing, even though such a large volume of investor buying is bound to have an impact. 

The Bank of Canada data is a rare and incomplete look at the amount of market activity driven by investors. It was disclosed in May in the bank’s latest financial system review. It defines investors as borrowers who obtain a mortgage to buy a property while maintaining a mortgage on another property. It does not include all-cash transactions and only goes back to 2015, when the country’s real estate market was already frothy.

It shows that the share of investor buying in Canada reached a high of 21.7% in spring of 2018, before dipping just below 20% in 2019. The most recent reading was 20.1% in February. In the Greater Toronto Area and Hamilton, two markets the bank has identified as exuberant, the share was 22.7% in February.

“When investors go into the market in a big way, they can drive up the house prices,” said Aled ab Iorwerth, deputy chief economist with the federal housing agency, the Canada Mortgage and Housing Corp, adding that the longer-term effect is that investors are often a source of financing to develop more housing and increase supply.

Real estate investors have come under more scrutiny after news broke that a Toronto condo developer is planning to buy $1-billion worth of single-family homes in Canada to rent by 2026. With the country’s rental vacancy rate below 3% and an affordable housing crisis raging across the country, rental homes have become coveted assets for big investors who believe they can earn steady profits by increasing rents.

Toronto-based Core Development Group Ltd. is the first big investor in the country to establish a large-scale single-family home rental business. If Core succeeds, it could entice other institutional investors, such as private equity firms and pension funds, to join in a big way.

So far, those investors are spending billions of dollars to own apartment buildings, also known as purpose-built rentals. In the past year, there were $12.9-billion worth of apartment building deals, according to data from commercial real estate company Avison Young. That included two private equity firms, Starlight Investments and KingSett Capital, buying 27,000 apartment units and several hundred short-term rental apartments across Canada for $4.9-billion last November.

Martine August, assistant professor at University of Waterloo’s school of planning, said Core Development’s acquisition of rental units is low compared with the total of hundreds of thousands of apartments bought by other investors. However, she said both types of purchases are cause for concern and part of the same process of profiting at the expense of tenants.

Part of what has driven investors to buy rental properties is low vacancy rates and shortage of affordable housing. Home prices have risen so quickly that cities that were once considered affordable are nearing the $1-million mark. More residents, including high income earners, are unable to buy and are forced to rent.

In Canada, it is difficult to define, quantify and measure real estate investors and their effect on the market. Publicly available housing data is mostly from the real estate industry. The Canadian Housing Statistics Program, which was launched by Statscan after the 2016-17 real estate boom, is trying to fill data gaps and uses information from a bevy of sources, including property assessments, tax filings and census data. One of the program’s most revealing reports is from 2019 and examined properties that were not “owner occupied” in three provinces. It found the highest level of investor ownership in the residential area near the University of B.C. in Vancouver, where 47% of all property types were held by investors. It also found that in Toronto, more than one-third of the condo market is owned by people who do not live in the units and who either rent them out or leave them empty.

Andy Yan, housing expert and director of Simon Fraser University’s city program, and other affordable housing advocates question the idea that there is a supply shortage when so many property owners are investors. “You will constantly hear it is supply supply supply, but supply for whom,” he said.

The demand for real estate has spurred more development. Multiresidential building construction is at record levels this year, most of which are new condo developments. In Toronto, the price of a new condo averages $1,400 per square foot. That means that with a 20% down payment on a 500-square-foot one-bedroom, investors would have to lease their condo for over $3,000 a month to cover their mortgage payments, condo fees and taxes.

So far this year, Core has spent about $50-million on 75 properties in seven Ontario cities, including Hamilton and Barrie. That accounts for 0.06% of the total number of seasonally adjusted sales in Ontario, year to date, according to CREA data. The developer is adding basement apartments to its properties and turning houses into two rental units: a two-bedroom basement apartment renting for about $1,600 a month, and a three-bedroom above-ground unit at about $2,100 a month. CMHC’s deputy chief economist said the Core model does not reduce the supply of housing. “They are shifting it from homeownership to rental,” said Mr. Iorwerth.

Source: Globe and Mail


Housing Market Will Be First Casualty of Higher Interest Rates, Says Former BoC Economist

Activity in the housing market is becoming further detached from fundamentals, two new reports show, reinforcing fears among some housing experts that Canada’s real-estate market has entered a bubble. Bloomberg has ranked Canada as one of the bubbliest housing markets on the planet, while closer to home, a former Bank of Canada economist published research that suggests housing in Toronto and Ottawa is overvalued based on historical metrics, while Montreal is becoming increasingly so.

The heat in those eastern cities, combined with Vancouver’s chronically elevated prices, is making the national numbers frothy, as conditions in Calgary, Edmonton, and Winnipeg look reasonable, according to Alberta Central chief economist Charles St-Arnaud’s analysis. But since those places are home to 50% of Canada’s population, the Bank of Canada will be forced to raise interest rates extremely carefully because low borrowing costs are the only reason housing is affordable, St-Arnaud said.

“The housing market will probably be the first casualty of higher rates,” St-Arnaud, who previously worked at the Bank of Canada and for Morgan Stanley and Nomura Holdings Inc. in London, said. “When rates go up, that affordability will disappear very, very quickly.”

Bloomberg’s “Bubble Ranking” generates country scores by considering what it costs to buy a home compared with renting; the price-to-income ratio; inflation-adjusted price growth; nominal price growth; and the annual rate of household credit growth. New Zealand sits on top of the list, posting the highest marks in four of the five categories. Canada is second, followed by Sweden, Norway, and the United Kingdom, respectively.

National rankings of that sort are of limited use because housing is almost always driven by local factors, St-Arnaud said. That’s why he decided to focus on Canada’s seven biggest cities — Vancouver, Calgary, Edmonton, Winnipeg, Toronto, Ottawa and Montreal — to determine the extent to which affordability is stretched across the country.

The analysis showed that changes in interest rates could generate significant headwinds in the housing markets of major cities, as large numbers of people would otherwise struggle to keep up with lofty prices. So when Bank of Canada Governor Tiff Macklem looks to raise interest rates, as he has said he could do as soon as the second half of 2022, he will have to be mindful of the ripple effect the policy change could have on Canadian homeowners.

In May, housing prices climbed 11.3% nationally from the same month last year, according to Statistics Canada, thanks in large part to the record-low interest rates that the Bank of Canada put in place to counter the COVID-19 crisis. St-Arnaud determined that in Toronto, Vancouver, Montreal and Ottawa, a 2.5-percentage-point increase in the Bank of Canada’s benchmark borrowing rate would push those markets into “overvalued territory,” and therefore at greater risk of toppling into a bust.

To be sure, few see such a big increase coming anytime soon. However, the combination of higher prices and a smaller interest-rate adjustment would have a similar effect on affordability, St-Arnaud found. For example, a 10% jump in prices in those four cities, paired with a 1.5-percentage-point uptick in borrowing costs, would make those markets overvalued, according to his results. On the other hand, Calgary, Edmonton and Winnipeg could tolerate an interest-rate increase of five percentage points and still remain fairly valued, according to St-Arnaud.

A higher sensitivity to the level of borrowing costs than in the past will force a go-slow approach when the Bank of Canada decides to normalize monetary policy, St-Arnaud said. For that reason, Macklem should act preemptively in lifting rates to avoid having to raise borrowing costs quickly if inflation takes off, the economist said. “They need to take that into account …. and be very, very gradual as they can be,” said St-Arnaud. “A 25-basis-point hike will have more impact than we’ve seen over the past 20, 30 years.”

Source: Financial Post


Housing Fatigue

“You are starting to see some early signs of slowing in the housing market. We are expecting supply to improve and demand to slow down. We are expecting the housing market to come into better balance. It is going to take some time. It is something we are watching closely.”

— Tiff Macklem; Senate testimony; June 16, 2021.

Jonathan Gitlin, chief executive of RioCan Real Estate Investment Trust, told Larysa Harapyn on the Down to Business podcast recently that his growth strategy included condominiums. That might have struck some listeners as odd; Gitlin is in the business of satisfying demand and the pandemic has put a premium on space, not the shoeboxes that real-estate developers have been stacking in cities such as Toronto and Vancouver for the past decade or so. Intense demand for single and semi-detached homes is one of the main reasons housing prices spiked in the middle of a recession. “Canadians want more space,” Bank of Canada Governor Tiff Macklem told the Senate banking committee on June 16.

Canadians might want more space, but that doesn’t mean they necessarily need it. There was evidence last week that Canada’s latest bout of housing mania might have peaked, as the current price of a backyard and/or a home office clashes with the reality of what people are willing and/or able to pay.

The Canadian Real Estate Association reported on June 15 that monthly sales of existing homes dropped 7.4% in May, following an 11% decline in April. “More and more, there is anecdotal evidence of offer fatigue and frustration among buyers, and the urgency to lock down a place to ride out COVID would also be expected to fade at this point given where we are with the pandemic,” Cliff Stevenson, the association’s chair, said in a press release.

The average price was about $688,000, a little lower than in April, but much higher than in 2019, when the average price hovered around $500,000. Incomes haven’t increased that much, so it’s possible the market overshot this spring and is now settling at a new, albeit higher, plateau. The pre-pandemic trend for cheaper condominiums in bigger cities could be reasserting itself. Canada Mortgage and Housing Corp. said on June 15 that builders started work on single-family homes at a rate that would yield about 64,000 units in communities with populations greater than 10,000 people in May, an 18% drop from the previous month and the slowest annualized rate since December. At the same time, starts on all other types of housing increased 11% to about 191,000, leaving the annual rate of total housing starts slightly faster than April, at about 255,000.

Bottom line: builders such as RioCan aren’t betting on an exodus to the suburbs. The calculation could be that while the pandemic will be life-altering, it might not be life-changing. For Canadians, who seem bent on owning real-estate no matter what, the calculation could be as simple as this: if they are going to be house poor no matter where they go, they might as well settle in a big city, where they will at least be able to find something to do.

Source: Financial Post