Canada’s housing market remains at a high degree of vulnerability and housing starts set to level off

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OTTAWA, October 26, 2017 — Canada’s housing markets remain highly vulnerable1 with evidence of moderate overvaluation and price acceleration, according to  Canada Mortgage and Housing Corporation (CMHC). After a boost in residential construction in 2017, housing starts are projected to decline by 2019, but to remain close to the average level from the last 5 years.

This analysis is from two key CMHC reports released today: the Housing Market Assessment (HMA) and Housing Market Outlook (HMO).

CMHC’s HMA continues to find housing markets in Toronto, Hamilton, Vancouver, Victoria and Saskatoon highly vulnerable. There is low evidence of overbuilding overall at the national level but there are growing concerns surrounding overbuilding in Calgary, Edmonton and St. John’s. In these markets, the supply of new and unsold homes outweighs the demand for housing.

 
Transcript

Foreground: Bob Dugan, CMHC Chief Economist

Background: Library setting, library shelving

Bob Dugan: “We continue to see a high degree of vulnerability in Canada’s housing market, fuelled by moderate overvaluation and price acceleration. House price growth continues to outpace economic fundamentals like household income and population growth. In 2018 and into 2019, housing starts are projected to decline while house prices should increase, but at a slower rate than in the past four years.”

 

Housing Market Assessment (HMA) highlights

  • Despite the recent easing in Toronto’s resale market, we continued to detect moderate evidence of price acceleration with strong growth in home prices among all housing types. High house prices could not be explained by fundamental economic drivers such as income and population growth.
  • Hamilton’s housing market remained highly vulnerable for the fifth consecutive quarter. House prices continued to grow more quickly than levels supported by economic and demographic fundamentals.
  • Vancouver’s housing market remained highly vulnerable, with evidence of moderate overheating and price acceleration, and strong overvaluation. Imbalances remained between demand and supply in the resale home market, especially for multi-family units.
  • Victoria’s overheating persisted due to continued elevated sales for apartments and townhomes in the resale market, but very low inventories in the new home market of unsold homes to support the strong demand.
  • The Quebec CMA market is now reported to have low levels of vulnerability. However, overbuilding remains an area of concern as we continue to see vacancy rates increasing for conventional rental housing.

CMHC’s HMO provides a forward-looking analysis anticipating emerging trends in Canada's new home, resale and rental housing markets. Variables covered include housing starts, MLS® sales, and vacancy rates. Other economic factors considered in our analysis include economic and employment growth, migration, population and mortgage rates.

After the expected boost in residential construction for 2017, housing starts are projected to decline by 2019. Sales in the existing-homes market are expected to decline relative to the record level of more than 535,000 MLS® sales registered in 2016.

The average MLS® price should increase over the forecast horizon, but at a slower rate than in the past four years. The average should lie between $493,900 and $511,300 in 2017 and between $499,400 and $524, 500 by 2019.

Housing Market Outlook (HMO) regional highlights

British Columbia

Housing starts and MLS® sales in B.C. are expected to decrease in 2018 and 2019, but will remain above historical levels, while MLS® prices will continue to grow at a slower pace as the housing market moves towards more balanced conditions. Rental demand will continue to be strong through the forecast period, with vacancy rates remaining tight and average rents rising.

Prairies

Alberta and Saskatchewan’s gradual recovery from the oil-price shock that started in 2014 will likely contribute to positive net interprovincial migration flows, supporting housing markets. Housing market conditions are expected to continue to slowly transition from a buyer’s market to a more balanced one in 2018 and 2019. However, the overbuilding in many CMAs is expected to put downward pressure on new housing construction. Manitoba has a more diversified economy compared to the other two provinces, which has allowed it to mitigate the risk of large economic swings that the oil-producing provinces experience when oil prices move significantly.

Ontario

Ontario MLS® sales and starts will trend lower over the forecast horizon, with modest growth in home prices expected relative to the recent past. Rising mortgage carrying costs will exert downward pressure on housing demand and shift demand to multi-unit homes which includes condominium and rental units. Housing demand will hold up better in eastern and southwestern Ontario centres given higher affordability levels, fewer market imbalances and generally better economic conditions.

Québec

Stronger employment growth will stimulate housing demand in 2018 and 2019. As a result, the province’s resale markets will continue to tighten and prices are projected to rise. Meanwhile, population aging will continue to provide support to residential construction in the apartment segment.

Atlantic Canada

Housing starts, MLS® sales and prices are expected to rise gradually over the forecast period, but continued economic growth will rely heavily on boosting exports.

As Canada’s authority on housing, CMHC contributes to the stability of the housing market and financial system, provides support for Canadians in housing need, and offers objective housing research and information to Canadian governments, consumers and the housing industry.

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“We continue to see a high degree of vulnerability in Canada’s housing market, fuelled by moderate overvaluation and price acceleration. House price growth continues to outpace economic fundamentals like household income and population growth. In 2018 and into 2019, housing starts are projected to decline while house prices should increase over the forecast horizon, but at a slower rate than in the past four years.”

— Bob Dugan, Chief Economist, Canada Mortgage and Housing Corporation

Information on this release

For English inquires

Angelina Ritacco
CMHC Media Relations
416-218-3320
aritacco@cmhc-schl.gc.ca

For French inquires

Audrey-Anne Coulombe
CMHC Media Relations
613-748-2573
acoulomb@cmhc-schl.gc.ca

Additional data is available upon request.

CMHC media content available for this news release:

  • Bob Dugan Video Clip — English (10.0 MB)
  • Bob Dugan Headshot (4.01 MB)

Download this Media Package (ZIP — 13.9 MB)

Backgrounder

CMHC’s HMA analytical framework is designed to evaluate the extent to which there are vulnerabilities in Canadian housing markets. The framework assesses housing market conditions and considers the incidence, intensity and persistence of four main factors:

  1. Overheating of demand in the housing market, wherein sales significantly outpace new listings.
  2. Acceleration in house prices, which could be partially reflective of speculative activity.
  3. Overvaluation in the level of house prices, which indicates that house price levels are not fully supported by fundamental drivers such as income, mortgage rates and population.
  4. Overbuilding of the housing market, when the rental market vacancy rate and/or the inventory of newly built housing units that are unsold is elevated.

Each of these factors is measured using one or more indicators of housing demand, supply and/or price conditions. The table below outlines the results from the previous release in July 2017 and the current October 2017 release.

  Overheating Price Acceleration Overvaluation Overbuilding Overall Assessment
  Jul. 2017 Oct. 2017 Jul. 2017 Oct. 2017 Jul. 2017 Oct. 2017 Jul. 2017 Oct. 2017 Jul. 2017 Oct. 2017
Canada Weak Weak Moderate Moderate Moderate Moderate Weak Weak Strong Strong
Victoria Moderate Moderate Moderate Moderate Strong Strong Weak Weak Strong Strong
Vancouver Moderate Moderate Moderate Moderate Strong Strong Weak Weak Strong Strong
Edmonton Weak Weak Weak Weak Weak Weak Moderate Strong Moderate Moderate
Calgary Weak Weak Weak Weak Weak Weak Moderate Strong Moderate Moderate
Saskatoon Weak Weak Weak Weak Moderate Moderate Strong Strong Strong Strong
Regina Weak Weak Weak Weak Weak Weak Strong Strong Moderate Moderate
Winnipeg Weak Weak Weak Weak Weak Weak Moderate Moderate Moderate Moderate
Hamilton Moderate Moderate Moderate Moderate Strong Strong Weak Weak Strong Strong
Toronto Moderate Moderate Moderate Moderate Strong Strong Weak Weak Strong Strong
Ottawa Weak Weak Weak Weak Weak Weak Moderate Moderate Weak Weak
Montréal Weak Weak Weak Weak Weak Weak Weak Weak Weak Weak
Québec Weak Weak Weak Weak Moderate Weak Moderate Moderate Moderate Weak
Moncton Weak Weak Weak Weak Weak Weak Weak Weak Weak Weak
Halifax Weak Weak Weak Weak Weak Weak Weak Weak Weak Weak
St. John’s Weak Weak Weak Weak Weak Weak Weak Moderate Weak Weak
Degree of vulnerability
Low Moderate High

Note 1: Colour codes indicate the degree of market vulnerability. The HMA reflects a comprehensive framework that not only tests for the presence or incidence of signals of imbalances (that is, how far the indicator is from its historical average), but also considers the intensity and the persistence of these signals over time. Generally, low intensity and persistence are associated with a lower vulnerability. As the number of persistent signals increases, the evidence of an imbalance increases.

Note 2: Results at the CMA level are not segmented by housing type or neighbourhood. They represent an assessment of the entire CMA. However, specific CMA reports provide further detailed analysis of these markets.

Note 3: The colour scale extends to red only for those factors that have multiple indicators that can identify imbalances. As a result, only overvaluation and overbuilding can receive a red rating, since they are assessed using more than one indicator.

Note 4: To ensure the framework is as current as possible, on a regular basis, we undertake a model selection process whereby our house price models for overvaluation are tested for statistical significance at the national and CMA level. The result of this process may change the number of indicators showing vulnerability from the previous assessment.

1 As part of CMHC’s ongoing work to improve our products we have changed the HMA terminology to low-moderate-high degree of vulnerability replacing weak-moderate-strong evidence of problematic conditions.

 

Canada

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