January 17, 2022 | 10:27
Canadian Existing Home Sales (Dec.) — Investor Relations
Canadian existing home sales rose 0.2% in seasonally-adjusted terms in December (-9.9% y/y), finishing what was a to-the-moon year for housing demand. Note the use of the word ‘demand’—we’ll come back to that in a minute. New listings dipped in the month and were down 12.0% y/y in December, while the months’ supply of homes on the market fell to just 1.6—at the current sales rate, this is the tightest market we’ve ever seen.
As a result, prices continue to surge. The MLS HPI rose 26.6% y/y in December, the fastest clip on record back to 2000. Shorter-term momentum has not eased at all, with the 1-, 3- and 6-month annualized growth rates all in the 26%-to-36% range.
Very early last year, BMO Economics warned that policy (starting on the monetary side) needed to tighten in order to prevent the market from becoming dislodged from underlying fundamentals. And, that came from a team that spent many, many, years defending the Canadian housing market from wave after wave of bearish assault, as most of the gains were rooted in income, demographic and interest rate fundamentals. Now, it appears that 2021 was the year the market became unhinged.
Here are a few facts that highlight how demand and investor appetite have taken over:
-Sales volume in 2021 registered 30% above the 10-year average, highlighting the boom in demand. Meantime, new listings came to market exactly in-line with the 10-year average. That distinction between demand strength and very normal resale supply flow couldn’t be more obvious here, and flies in contrast to the popular narrative that we are supply starved. Of course, there are longer-term considerations on the supply side, but this is an acute situation.
-After strong stability through the decade pre-COVID, expectations of house price growth broke out to the upside. They peaked early last year, but have accelerated again to finish 2021. This is based on a weekly poll conducted by Nanos/Bloomberg.
-Teranet data (covering Ontario) show that investors (multiple-property owners) accounted for the largest share of transaction volume in 2021, and were the biggest driver of the increase in volume from pre-COVID levels.
-The Bank of Canada published findings last week, based on loan-level data. The data show that, as of June 2021, investor demand is up just shy of 100% y/y, well outpacing increases among repeat and first-time buyers.
-By August 2021, Canadians began taking on more in variable-rate mortgages than fixed-rate mortgages, which is a notable change in behaviour in a market that has traditionally been conservative users of fixed-rate product. The reason? Fixed mortgage rates backed up, and buyers had to shift to still-low variable rates in order to meet affordably and/or qualification criteria. That seems like a market that has been forced to stretch.
The Bottom Line: Expectations and investor appetite took over Canadian housing in 2021. We know it, and policymakers now know it too. Look for 100 bps of tightening by the Bank of Canada this year to help clean out some of the froth.