Is the Canadian Housing Market Now Running Amok?
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The average home price in Toronto famously topped $1 million for the first time on record in February, in yet another sign that the market is running extremely hot. Bank of Canada Governor Macklem said last week that “we are starting to see some early signs of excess exuberance, but we’re a long way from where we were in 2016-2017 when things were really hot.” Recall that 2016-2017 was characterized by mini-bubbles in and around Toronto and Vancouver that elicited macroprudential policy responses at both the federal and provincial levels. We’d argue that, rather than a long way off, we’re pretty well there. But, should we be concerned?
Reasons for concern:
The month-to-month growth in home prices is accelerating similarly to that seen in 2016-2017, with prices almost parabolic in some markets. At the current pace, national year-over-year price growth will blow through prior highs (+18.7% y/y) by April.
Residential mortgage credit growth accelerated to 7.7% y/y as of December, well above the 2016 high (6.7% y/y), and is approaching rates last seen coming out of the financial crisis.
Increasing speculation is a tricky one to prove, given that proprietary metrics like the 12-month turnover rate or rental investment rate take time to find their way into the data. For example, a property needs to close (which takes at least a couple months), then be held and flipped onto the resale or rental market. In reality, we probably wouldn’t see hard evidence of speculative buying today until into 2022. But let’s just say that, on the ground, there is some clear price insensitivity developing.
Reasons against concern:
Non-mortgage consumer credit growth has actually turned negative over the past year, as households have shifted their borrowing patterns. So, while residential mortgage credit carries twice the weight, the drop in consumer borrowing has held overall credit growth more in check.
Strength shifting outside the major cities is acting as an affordability valve and reflects a shift in preferences that will at least partly stick longer term. While gains in smaller markets look dramatic, some buyers are bidding values up with an eye on improved overall affordability. One could argue that this relative repricing is the market functioning properly.
Past mortgage rule changes have insulated the market from rate shocks. Heading into 2021, while homebuyers are offered five-year fixed mortgage rates in the 1.5%-to-1.7% range, they are qualifying at 4.79%. Even with a strong back-up in yields underway, we’re unlikely to see that level this cycle.
If it’s looking like a draw at this point, affordability (or valuation) metrics suggest that we are indeed pushing the limits of comfort. Measured by the mortgage payment as a share of household income (on the average-priced home), valuations have worsened over the past year, and have moved above 2016-2017 levels nationally (or well above in Ontario). That is, prices have run well ahead of the decline in mortgage rates and income growth. Keep in mind that these measures are based on primary income sources (i.e., wages and salaries), and they become less concerning if federal transfer income is included (though we probably shouldn’t consider massive pandemic-related transfers as permanent in justifying housing valuations).
Bottom Line:
There have been real fundamental shifts driving housing market activity in an exceptionally unique year, but some intense scrutiny is probably now warranted with the market gaining strength early in 2021. A meaningful back-up in fixed mortgage rates could curb some momentum, but that likely won’t begin to bite until the second half of the year. Widespread vaccination could also ease the rush as spending on services and travel resume, but those winds realistically won’t shift until 2022. In the meantime, the risk remains upward.
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Robert Kavcic
Director and Senior Economist
Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing economic, fiscal and real estate trends in Canada. Robert regularly contribut…(..)
View Full Profile >The average home price in Toronto famously topped $1 million for the first time on record in February, in yet another sign that the market is running extremely hot. Bank of Canada Governor Macklem said last week that “we are starting to see some early signs of excess exuberance, but we’re a long way from where we were in 2016-2017 when things were really hot.” Recall that 2016-2017 was characterized by mini-bubbles in and around Toronto and Vancouver that elicited macroprudential policy responses at both the federal and provincial levels. We’d argue that, rather than a long way off, we’re pretty well there. But, should we be concerned?
Reasons for concern:
The month-to-month growth in home prices is accelerating similarly to that seen in 2016-2017, with prices almost parabolic in some markets. At the current pace, national year-over-year price growth will blow through prior highs (+18.7% y/y) by April.
Residential mortgage credit growth accelerated to 7.7% y/y as of December, well above the 2016 high (6.7% y/y), and is approaching rates last seen coming out of the financial crisis.
Increasing speculation is a tricky one to prove, given that proprietary metrics like the 12-month turnover rate or rental investment rate take time to find their way into the data. For example, a property needs to close (which takes at least a couple months), then be held and flipped onto the resale or rental market. In reality, we probably wouldn’t see hard evidence of speculative buying today until into 2022. But let’s just say that, on the ground, there is some clear price insensitivity developing.
Reasons against concern:
Non-mortgage consumer credit growth has actually turned negative over the past year, as households have shifted their borrowing patterns. So, while residential mortgage credit carries twice the weight, the drop in consumer borrowing has held overall credit growth more in check.
Strength shifting outside the major cities is acting as an affordability valve and reflects a shift in preferences that will at least partly stick longer term. While gains in smaller markets look dramatic, some buyers are bidding values up with an eye on improved overall affordability. One could argue that this relative repricing is the market functioning properly.
Past mortgage rule changes have insulated the market from rate shocks. Heading into 2021, while homebuyers are offered five-year fixed mortgage rates in the 1.5%-to-1.7% range, they are qualifying at 4.79%. Even with a strong back-up in yields underway, we’re unlikely to see that level this cycle.
If it’s looking like a draw at this point, affordability (or valuation) metrics suggest that we are indeed pushing the limits of comfort. Measured by the mortgage payment as a share of household income (on the average-priced home), valuations have worsened over the past year, and have moved above 2016-2017 levels nationally (or well above in Ontario). That is, prices have run well ahead of the decline in mortgage rates and income growth. Keep in mind that these measures are based on primary income sources (i.e., wages and salaries), and they become less concerning if federal transfer income is included (though we probably shouldn’t consider massive pandemic-related transfers as permanent in justifying housing valuations).
Bottom Line:
There have been real fundamental shifts driving housing market activity in an exceptionally unique year, but some intense scrutiny is probably now warranted with the market gaining strength early in 2021. A meaningful back-up in fixed mortgage rates could curb some momentum, but that likely won’t begin to bite until the second half of the year. Widespread vaccination could also ease the rush as spending on services and travel resume, but those winds realistically won’t shift until 2022. In the meantime, the risk remains upward.
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