Canada’s Housing ‘Dual Market’ Poses Difficult Policymaker Challenge
Canada’s Housing ‘Dual Market’ Poses Difficult Policymaker Challenge

Canada’s housing market has cooled off slightly from this summer, but regional disparities make one-size-fits-all approaches to controlling it difficult.

The Canadian Real Estate Association (CREA) reported Oct. 15 that September’s national home sales fell 1.4 percent from the August level—the first monthly decline since January.

In addition, house prices only rose 0.3 percent in September after a rise of 0.8 percent in August, according to the Teranet–National Bank House Price Index (HPI) measure released the same day. On a year-over-year basis, prices rose 5.4 percent. 

CREA notes that year-over-year price growth has been in the range of about 5.0 to 5.5 percent since the start of the year, based on the Multiple Listing Service HPI measure.

Canada’s housing market would be characterized very differently if it were not for Vancouver, Calgary, and Toronto. By both Teranet–National Bank HPI and MLS HPI measures, these three cities topped the national level notably.

Based on the Teranet–National Bank HPI, Calgary has had the strongest price growth at 9.5 percent, followed by Toronto at 7.4 percent, and Vancouver at 6.5 percent. Without these three cities, the other eight cities in the index saw an average price increase of about 1.8 percent. 

Housing starts climbed slightly from August to September, but remain below the year’s high point of 203K in July. This suggests, according to BMO’s Oct. 8 housing starts analysis report, that “overall building activity in Canada remains within the range required to satisfy demographic demand.”

Only Alberta’s September housing starts were significantly over the province’s 12-month average and level from a year ago, according to the analysis from BMO. “Alberta simply needs the homes, with the population expanding close to 3 percent year-over-year and rent growth now running at a five-year high,” BMO stated in its report.

Housing starts are weak in most parts of the country, notably Quebec and Atlantic Canada. Even Toronto condo starts hit a 4.5-year low in the third quarter.

No Bubble

Canadian finance minister Joe Oliver gave a press conference on Oct. 14, after his meeting with private sector economists in Toronto. He reiterated that he doesn’t believe there is a housing bubble, a view that echoes that of the Canada Mortgage and Housing Corp. (CMHC), the Bank of Canada, the Organisation for Economic Co-operation and Development (OECD), and Scotiabank CEO Brian Porter.

Oliver touched on the “dual market” in Canadian real estate in that Toronto, Calgary, and Vancouver are seeing price increases while the rest of the country isn’t. 

What do these three cities have going for them that others in Canada do not? Young populations, immigration growth, and good employment prospects are a few reasons. Vancouver also benefits more than other regions from Chinese foreign investment.

Regarding concerns on an overheating housing market, Oliver listed measures that his predecessor, the late Jim Flaherty, took to cool the housing market. “[We’ve] taken the froth, we believe, out of the market,” Oliver said. “[We] don’t see the need for dramatic changes.”

Looking Ahead

The effects of lower mortgage rates through much of 2014 has spurred home sales and price increases and likely played a role in household debt-to-disposable income ticking up in the second quarter, a more worrisome sign. The Bank of Canada did note at its last rate-setting meeting on Sept. 3 that “activity in the housing market has been stronger than anticipated.” It has since moderated slightly, but regional disparities are more pronounced.

And as the global economy takes a turn for the worse with disinflationary concerns and weakness most notably emanating out of Europe and China, bond yields are reaching their lowest levels in over a year. 

Canada’s five-year bond yield is at its lowest level since May 2013. This creates the potential for lower fixed-rate mortgages and potentially another wave of home price increases and sales as houses are seen as more affordable. Canadian borrowers could get more in debt as well.

In the last couple of weeks, three of Canada’s big banks have lowered significantly their five-year fixed mortgage rates. The average five-year fixed mortgage rate from the six big Canadian banks was 3.53 percent on Oct. 15, down from 4.08 percent a week earlier.

Macroeconomic policy and monetary policy are very blunt tools as they are applied across the whole economy. What might be appropriate in Vancouver would clearly not be in Quebec City, for example.

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