February 15, 2022 | 10:13
Canadian Home Sales — Q&A Session
Canadian existing home sales rose 1% in January on a seasonally-adjusted basis, but were down 10.7% from extremely heated year-ago levels. New listings fell 11% in the month, or 9.6% from a year ago, contributing to what is now arguably the tightest market on record. As a result, prices continue to run, with the MLS HPI rising 2.9% in January alone, or a record 28% from this time last year. On an seasonally-adjusted annualized basis, prices have been running at a roughly 40% clip since September. See Table 1 below for some of the regional gains.
In a separate release, new construction activity remains robust with Canadian housing starts registering 231k annualized in January. That's down from peak levels seen over the past year, but still adds to a solid level of supply in the pipeline.
With all the back and forth on housing trends of late, let's try to clear a few things up with some Q&A:
It’s demand. Canadian sales volume is running roughly 35% above pre-COVID trends, highlighting the acute boom in demand. Unit sales are still trending about 150k per year in excess of the pre-COVID baseline (Chart 1).
Yes. There is underlying demographic demand strength driven by aging millennial households and international immigration. These are powerful fundamental sources of demand, but they had already been in place for years prior to COVID.
Yes. The Bank of Canada is not alone in setting policy too easy for too long, but it has certainly contributed to higher prices. Recall that rate cuts in 2015 lit a fire under non-oil-producing markets, and they only cooled after policy tightened. Today, markets across the country are feasting on deeply negative real interest rates, and a lack of response has helped stoke expectations of higher prices (Chart 2).
Canadians are also now 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.
Yes! Armed with expectations of continued price gains, investors have become the biggest source of marginal demand.
Teranet data (covering Ontario) show that multiple-property owners (investors and recreational-property) accounted for the largest share of transaction volume in 2021, and were the biggest driver of the increase in volume from pre-COVID levels that persists today (Chart 3). Alternate data from the Bank of Canada show that investor demand has roughly doubled in the past year.
We’re sympathetic to concerns on the supply side, especially in Ontario, such as approval delays and a mismatch in housing type to demographics. In fact, we’ve argued for years that a wave of millennial households would push up against a policy-driven shift toward intensification and multi-family development (dating back to 2006), and drive up single-detached prices. The pandemic has magnified that trend and pushed it out to smaller markets. But, that’s a longer-term explanation for what is a very short-term explosion in prices.
For the past year, new listings have actually come online at a normal rate, but market balance and inventory measures look extraordinarily tight because of the boom in demand. When listings are being vaporized in days by multiple offers, it’s a demand issue. Expectations of price growth could even be holding back listings as well as boosting demand.
The highly-publicized Ontario Housing Affordability Task Force recommended building 1.5 mln homes in Ontario over the next decade. Interestingly, there are already almost 150k units under construction in the province, well above peaks set in past construction booms (Chart 4). Suffice it to say that a wave of completions is coming, it just takes more time because of how the composition of new housing stock has changed (more multis).
While Canada has among the lowest housing stock per person when compared to the G10 and Australia, it can largely be explained by social factors.
Chart 5 looks at a pair of factors that help shape how much housing a country has on a per-capita basis: How big households are (plenty of kids and multi-generational families); and, how prevalent detached homes are in the housing mix. Canada ranks above average in both categories. In fact, when plotted against other nations with these factors in mind, Canada’s housing stock looks just about right
We have a fundamentally-strong housing market that has been allowed to overheat by too-loose policy. It's going to take higher interest rates to alter the market psychology, cool excess demand and price growth. That day is fast approaching.
Table 1 - Canada — Existing Home Sales