Renting Increased by Three Times the Rate of Home Ownership in Last Decade
Royal Bank of Canada economists say the country has reached a record number of renters as the number of people renting has increased at three times the rate of homeowners in the past decade.
Assistant chief economist Robert Hogue and economist Rachel Battaglia say in a report that although homeowner households still dominate the housing market by a two-to-one ratio, renters account for most of the recent growth, the report said. In the past 10 years, rentership increased by 22% or 876,000 households, while homeownership increased 8% or 770,000 households.
The economists say those millennials born between 1981 and 1996 are fuelling some of the renting growth because their ownership rates are lagging those of previous generations at the same age and they are facing even higher home prices than their predecessors. Baby boomers born between 1946 and 1964 are playing a role too, surpassing millennials as the fastest growing group of renters over the last decade.
Similarly, more households in both big and small cities are renting, suggesting affordability issues in large, and that urban areas may not be the only driving force. The report found that renter growth over the past decade was stronger in smaller cities at 22%, than in larger cities (21%).
What’s fuelling the rental demand? The report points to the country’s demographic trends, which include rising immigration and an aging population.
Immigrants represent a disproportionately high share of rental households and Canada’s rapidly growing immigration targets, rising to more than 401,000 in 2021 from 250,000 in 2011, have significantly boosted the demand for rental housing. The report said 56%, or 640,700 of the one million recent immigrants living in private dwellings, were in rental housing in 2018.
The aging population has also boosted demand, with 22% of the five million tenant-occupied dwellings recorded in 2021 occupied by seniors (aged 65 and up), compared to 19% in 2011.
Another factor is that more Canadians are choosing to live alone and represented almost 30% of all households in 2021. Single people overtook married couples in 2016 as the most prominent household type. Many of these individuals end up renting because the high cost of homeownership often requires two incomes.
Affordability challenges are also affecting younger generations trying to climb the housing ladder. Millennials are lingering in rentership three to five years longer than their baby boomer counterparts before entering homeownership, the report said.
The many programs designed to help first-time homebuyers do not seem to be doing much either, as the rate of homeownership — 66% in 2021 — is trending lower.
The economists predict this growing demand will place “tremendous” pressure on the country’s rental housing stock and require concerted efforts from policymakers, developers and builders to meet those needs.
Deteriorating Housing Affordability Conjures the 1980s When Real Estate Took a Dive
Deteriorating housing affordability in Canada is giving the bad old 1980s a run for its money, according to National Bank of Canada Economics. Economists Kyle Dahms and Alexandra Ducharme lined up several current metrics against those from the 1980s and found the data underlying this housing downturn is either beating or close to matching the data from that decade horribilis, when the real estate bubble grew so big that it resulted in a correction lasting more than a decade.
For example, Canada has recorded seven straight quarters of declining housing affordability compared with 11 quarters from 1986 to 1989, Dahms and Ducharme said in an investor note. But “the magnitude of the deterioration is much more pronounced this time,” with affordability falling 25.5% compared to 20.2% in the 1980s.
For those unfamiliar with the housing market of the 1980s, it was a time of frothiness with house prices in the Greater Toronto Area, for example, more than doubling over three years. Interest rates rose into the double digits before the bubble burst in 1989, with prices subsequently falling for seven straight years.
Housing costs are considered affordable if they account for 30% or less of a household’s budget, but the mortgage on a “representative home” today consumes 67.3% of the average household’s income. The last time the measure was so high, according to Dahms and Ducharme, was in 1981.
Interest rates are obviously far off the almost 20% hit in the late 1980s. Nevertheless, the Bank of Canada has increased rates seven times since March to 4.25% from 0.25%. The increases have come as a shock to homebuyers used to super-low borrowing rates. National Bank calculated that an increase of 75 basis points on an average five-year mortgage represents an increase of about $300 per month in home-servicing costs.
More evidence of deteriorating affordability can be found in the Royal Bank of Canada’s long-running index that measures ownership costs as a percentage of household median income. That index’s reading for the second quarter was at 65.9% for a single detached home, while the aggregate measure, representing all types of accommodation, was 60%.
National Bank said home affordability dropped during the third quarter in all 10 of the real estate markets it looked at in the third quarter. The affordability details are almost not to be believed.
In Toronto, where the median price for all dwellings is about $1.25 million, National Bank calculates, using its five-year benchmark mortgage rate, that it would take a prospective buyer 335.3 months to save up for a 20% down payment of $250,967. Mortgage payments would be $6,967 per month, representing 93.1% of an average household’s income. The current qualifying annual income is $253,934. In Vancouver, it would take 367.8 months to save up for a 20% down payment of $275,503 on a median-priced house of about $1.38 million.
Things are more reasonable and attainable in Calgary, where it would take 33.5 months to save enough money for a 5% down payment of $25,101 on a home priced at $501,009. Monthly payments would be $2,782, or 37.2% of income.
In Canada, there are different requirements for minimum down payments depending on the price of a home. The minimum down payment for properties valued at up to $500,000 is 5%, according to the Financial Consumer Agency of Canada. “Some lenders may require more,” it said on its website. When the purchase price rises above $500,000, the minimum down payment is 5% for the first half-million dollars and 10% for the remaining amount.
Rising interest rates have at least started to dampen housing prices. The current price of an average home has fallen 10% from its high in February, which is when the Bank of Canada embarked on its hiking campaign. Canada Mortgage and Housing Corp. recently said it expects average home prices to fall as much as 15% from their peak.
National Bank said there is a light at the end of the affordability tunnel. Price declines “combined with stabilization of the five-year benchmark mortgage rate should improve affordability in the coming quarters,” its economists said.
Source: Financial Post
Building permits, October 2022
The total value of building permits in Canada declined 1.4% in October to $10.0 billion. Losses in the residential sector more than offset gains from the non-residential sector.
On a constant dollar basis (2012=100), the total value of building permits decreased 0.9% to $6.0 billion.
Residential sector cools off for second month
The value of residential permits declined 6.4% to $6.5 billion nationally in October. Similarly, the number of new residential units decreased 4.6%, mainly due to single-family dwellings (-9.3%) which fell for the fifth consecutive month.
The value of building permits in the multi-family component decreased 6.9%, with Ontario posting its second consecutive decline after reaching its peak in August. Nova Scotia also recorded a large decline following its record high in September.
The single-family homes component declined 5.8% in October as eight provinces posted a drop in construction intentions. Conversely, Manitoba saw a notable increase of 14.3% following two weaker months.
Ontario pushes up non-residential sector
The total permit value of the non-residential sector increased 9.5% to $3.5 billion in October.
Construction intentions in the commercial component sharply increased by 18.0% in October. Ontario posted the largest gain, with multiple projects valuing over $20 million, while in September, one permit was reported above this level.
The value of building permits in the industrial component sharply increased by 16.2%, largely due to Ontario, which reported a $114 million permit for a water/sewer project in Erin. New Brunswick also posted notable gains, with three projects valuing over $5 million each.
The institutional component continued to slow as it dropped 17.1% in October, following a 38.2% decrease in September, reaching its lowest value since May 2020.
Source: Statistics Canada
Montreal Home Sales for November Drop to Levels Not Seen Since 2014
The Quebec Professional Association of Real Estate Brokers says November home sales in Montreal dropped to a level not seen since 2014 as rising interest rates lowered activity and drove up inventory. Sales for November totalled 2,716, a 38% drop from 2021 for the largest November drop since the Centris provincial database was created in 2000.
The association says higher interest rates weighed across the market, though sales in the multiplex segment saw the biggest declines at 605 compared with 2021, while condo sales were down 41% and single-family home sales were down 30%.
Prices were fairly stable in the month with condo prices unchanged from October and single-family home prices up slightly, while compared with 2021, prices were down 2% for condos and 1% for single-family homes.The median price for a condo was $380,000, while it was $520,000 for a single-family home, and in the multiplex segment of between two and five units, the median was $715,000.
“… [i]n November, the number of new listings is trending downward again, indicating that potential sellers are not rushing to sell their properties, or are not yet feeling compelled to do so,” Charles Brant, director of market analysis at QPAREB, said. Active listings were up 58% compared with 2021 at 16,397, while new listings were down 3% from 2021.
Toronto Home Prices Continue Consecutive Decline Into December
Rising interest rates continue to hit the real estate market across the Greater Toronto Area as home sales, listings and the composite benchmark price all declined both year over year and month over month in November. According to monthly figures released by the Toronto Regional Real Estate Board, GTA homes sales slipped by 49% over November 2021 to 4,544 units while month-over-month sales declined as well.
New listings in November also tumbled, down 11.6% to 8,880 from 10,044 in 2021. Meanwhile, the composite benchmark price fell 5.5% to $1,089,800 from $1,163,323 in November 2021. Average price of all home types sold fell 7.2% to $1,079,395 from $1,162,564 over the same time period.
The number of new listings in November was 14.5% below October and 11% below November of 2021. That suggests that variable-rate mortgage borrowers have been able to handle the significant rise in interest rates. “This does suggest that higher borrowing costs have not prompted a spike in listings due to affordability issues,” said Jason Mercer, the board’s chief market analyst, adding that higher wages have helped homeowners deal with the higher borrowing expenses.
“Increased borrowing costs represent a short-term shock to the housing market,” TRREB president Kevin Crigger said in the report. “Over the medium- to long-term, the demand for ownership housing will pick up strongly. This is because a huge share of record immigration will be pointed at the GTA and the Greater Golden Horseshoe (GGH) in the coming years, and all of these people will require a place to live, with the majority looking to buy. The long-term problem for policymakers will not be inflation and borrowing costs, but rather ensuring we have enough housing to accommodate population growth.”
Market activity has fallen dramatically since the Bank of Canada began raising interest rates in March. However, TRREB believes that immigration will force the hands of those who have chosen to stay on the sidelines.
In an interview, TRREB’s chief market analyst Jason Mercer said that immigrant households tend to focus on becoming homeowners. As a result, he sees long-term demand as Canada opens its borders to a record number of immigrants in the coming years.
“If you think about the long-term demand for housing, whether you’re talking about ownership housing or rental housing, the Greater Golden Horseshoe and certainly the GTA is the single greatest beneficiary of immigration in Canada,” Mercer said.
That suggests competition in the housing market will compel buyers to return to the market despite steep interest rates.
TRREB’s data for November showed that semi-detached homes have been hit the hardest with an average price decline of 13.9% year over year, with Halton Region claiming the title of the largest decline across all home types at 11.18% over the same time period.
The average price of a condominium dipped in November by 0.9% after outperforming all other housing types in October.