Canadian home sales back off last month’s high, but are still elevated
Canadian existing home sales fell 2.8% m/m in May, but were still up 9.6% from last year. Listings fell by more, leaving the Canadian housing market in seller’s territory for a third consecutive month, as per by CREA’s definition. The tighter housing marked was supportive of prices, with the average sale price up 13.2% from year ago levels – a third monthly double-digit gain. The price pressures have become fairly broad with even the quality adjusted home prices rising at a double-digit pace of 12.5% year-over-year.
From a regional perspective, the sales decline was fairly broad based in May. Despite a modest set back in May, Toronto and Vancouver still remain the hottest markets in the country, with demand above historical levels and prices rising at a double-digit pace year-over-year. Home prices were up 29% y/y in Vancouver and 15% y/y in Toronto. Moreover, the strong demand is increasingly spilling into their more affordable surrounding areas, which are also booming. Excluding Ontario and B.C., home prices were down 0.7% y/y.
Outside B.C. and Ontario, price growth has remained largely muted as most markets are amply supplied. Inventory (as measured in months’ supply) is almost triple that of Toronto and Vancouver, in markets in Alberta, Saskatchewan and Winnipeg, and almost 6-times higher in markets east of Ontario. Of the markets tracked by the quality adjusted MLS home price index, the only markets where home prices are falling on an annual basis include Calgary (-3.9% y/y) and Saskatoon (-2.3% y/y) – both hard hit by the commodity downturn.
Key Implications
- The spring selling season market is just one month from being done and despite the May set back, it has been a hot one for Ontario and British Columbia. In fact, May’s decline looks more like a supply story, rather than a demand story, with not enough homes on the market to fulfill what appears to be insatiable demand. Indeed, the months of inventory fell to record low levels in both B.C. and Ontario.
- While the housing market has defied the law of “what goes up, eventually comes down” over and over again in recent years, the speed at which both demand and prices have risen in the last year are a growing concern. The Bank of Canada noted that the markets with the best labour market outperformance (Ontario and B.C.) correspond to those with the hottest housing markets, with the opposite is true for the weakest regions economically (Alberta and Saskatchewan). We expect the correction in the Prairie Region to continue in 2016 with on-going job losses.
- But, employment gains alone don’t account for the rapid home price growth experienced recently in the hottest markets, leading to concerns that the market activity may prove unsustainable. CMHC has pegged the current situation in Toronto as “problematic”, and we suspect will flag Vancouver’s rating to that category soon.
- While we continue to argue that the current pace of demand is unsustainable, there also appears little in the way to stop it in the near-term. Mortgage rates have once again fallen to record low levels and even if the government chose to impose more macro prudential regulation, so many more households are purchasing with conventional mortgages, that the impact would likely prove negligible. Canadian home prices are expected to rise at a double-digit pace in 2016, with all that strength concentrated in B.C. and Ontario. We do expect interest rates to edge higher and take some steam out of demand, eventually, but that will mostly likely be a 2017 story.
- The one wild card is foreign investment. There is evidence that foreign buying may have picked up sharply since 2012. However we don’t know 1) how large it actually is 2)how fleeting it can be or 3) what the recent appreciation in the Canadian dollar will mean for international investment going forward. As such, it adds a significant layer of uncertainty around demand dynamics of Canadian housing.