Canada Housing Market Outlook: Housing Market Weathers the Storm, but the Pandemic Will Eventually Take a Toll - Moody's Analytics
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ANALYSIS
SEPTEMBER, 2020
Canada Housing Market Outlook:
Housing Market Weathers the Storm,
Prepared by
but the Pandemic Will Eventually Take a Toll
Abhilasha Singh
Abhilasha.Singh@moodys.com
Economist INTRODUCTION
Contact Us Despite sustained weakness in the job market, house prices in June rose 0.9% over the previous
month. Fiscal stimulus measures and mortgage deferrals, combined with low interest rates and
Email Canada’s strong demographics, have kept Canada’s housing market marching ahead throughout
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the COVID-19 crisis. The housing market’s vigor will fade as high unemployment and lower
U.S./Canada incomes will restrain buyers’ return to the market.
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EMEA House prices are set to fall from their current levels. However, the speed of the drop will vary
+44.20.7772.5454 (London) considerably across provinces. All regions will experience price declines, but the Prairie provinces
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will register the most sizable peak-to-trough decline.
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MOODY’S ANALYTICS Canada Housing Market Outlook: Housing Market Weathers the Storm, but the Pandemic Will Eventually Take a Toll 1Canada Housing Market Outlook:
Housing Market Weathers the Storm,
but the Pandemic Will Eventually Take a Toll
BY ABHILASHA SINGH
D
espite sustained weakness in the job market, house prices in June rose 0.9% over the previous month.
Fiscal stimulus measures and mortgage deferrals, combined with low interest rates and Canada’s strong
demographics, have kept Canada’s housing market marching ahead throughout the COVID-19 crisis. The
housing market’s vigor will fade as high unemployment and lower incomes will restrain buyers’ return to the market.
House prices are set to fall from their current levels. However, the speed of the drop will vary considerably
across provinces. All regions will experience price declines, but the Prairie provinces will register the most
sizable peak-to-trough decline.
Recent performance Residential construction came to a stand- ue of residential building permits in April was
The effort to combat the spread of the still in March and April in many parts of the down 22% from February levels while home
COVID-19 outbreak left its mark on the Ca- country as lockdown and social distancing resales plunged a whopping 57% to 199,176
nadian economy. Canada’s GDP contracted orders prohibited workers from entering job annualized units in April and newly listed
at an annualized rate of 38.7% in the sec- sites. Even in areas with few restrictions, de- homes declined by 56%.
ond quarter—the worst decline on record. mand for new homes collapsed overnight as The rate of new COVID-19 cases has
Unemployment soared to 13.7% in May, buyers were cautious because of skyrocketing edged higher since bottoming out in early
exceeding the record high of 13.1% from unemployment, economic uncertainty, and July as Canada’s economy reopened, but
late 1982. fears of contracting COVID-19. The total val- the rate is holding stable at about a fifth
Chart 1: Labor Market Is Weak… Chart 2: …Yet House Prices Rally
% change yr ago
22 16 14
Employment, mil (L) Unemployment rate, % (R) New-house and land price index
12
20 14 RPS composite HPI
10
12
18 8
10 6
16 4
8
2
14 6
0
12 4 -2
Jan Feb Mar Apr May Jun Jul Aug 17 18 19 20
Sources: Statistics Canada, Moody’s Analytics Sources: RPS, Moody’s Analytics
Presentation Title, Date 1 Presentation Title, Date 2
MOODY’S ANALYTICS Canada Housing Market Outlook: Housing Market Weathers the Storm, but the Pandemic Will Eventually Take a Toll 2Chart 3: Construction Back to Normal Chart 4: Housing Demand Bounces Back
Housing starts, ths, SAAR
300 700 8
Sales, ths, SAAR (L) Inventory-to-sales ratio, mo (R)
650
260 Jul-Aug avg 7
600
6
220 550
500 5
180 450
4
400
140
3
350
100 300 2
15 16 17 18 19 20 13 14 15 16 17 18 19 20
Sources: CMHC, Moody’s Analytics Sources: CREA, Moody’s Analytics
Presentation Title, Date 3 Presentation Title, Date 4
of its early-May peak. The reopenings have Home resales edged higher as provincial index registering a monthly appreciation of
spurred job growth, yet employment in Au- economies began to reopen and buyers and 0.9% in August, boosting the year-over-year
gust was still lower than February’s pre-pan- sellers became more comfortable transacting pace to 7.6%—the fastest pace since late
demic high by more than 1 million jobs. Un- under social distancing rules. Home resales 2017. High absorption of new homes is push-
like the labor market, which remains in poor surged 26% month over month to an all- ing up new-house prices. The new-house and
shape, the residential real estate market has time high of 637,000 annualized units in land price index rose by 0.4% on a month-
not just weathered the crisis but thrived (see July, largely due to pent-up housing demand ago basis at the national level and by 1.8%
Charts 1 and 2). during lockdowns (see Chart 4). Home re- year over year.
Fiscal support such as unemployment sales growth has been primarily driven by While house prices have been marching
assistance, onetime stimulus checks, and six- single-family detached homes as opposed to ahead, consumer debt performance has
month deferrals on mortgage payments for condominiums, which supports the notion shown some signs of strain. Bankruptcy
troubled borrowers in the early months of the that the pandemic is driving more buyers to filings and insolvency proposals have been
lockdown has preserved household balance the suburbs and unshared property spaces. rising since late 2018. Further, Statistics Can-
sheets, and demand is rebounding. New listings rose sharply Canada-wide ada’s mortgage debt service ratio at 6.7% of
Record low interest rates are also stim- in July. With demand outstripping supply, disposable income in the first quarter of 2020
ulating demand. The Bank of Canada has inventories have reached a record low of 2.8 is still high compared with 6.4% of dispos-
cut its benchmark interest rate for the months as homeowners who occupy their able income in mid-2016.
third time since the pandemic started. homes have declined to offer their residence Meanwhile, the BoC’s housing affordabil-
The benchmark five-year mortgage rate for sale out of concern of being exposed to ity index—the cost of owning a home as a
has fallen from 5.04% in March to 4.79%, the coronavirus. The tightening in the housing share of a household’s disposable income—
translating to greater purchasing power market is also evident in the Canadian Real improved in the second quarter of 2020
for homebuyers. Estate Association’s sales-to-new-listing ra- after having deteriorated in the three prior
Construction activity has returned to tio, a reliable gauge of price pressure; the ra- quarters. However, the improvement in the
pre-pandemic levels (see Chart 3). Annual- tio jumped to 0.74 in
ized housing starts jumped to 262,000 in July, one of the high-
August from 226,000 a year earlier, marking est levels on record Chart 5: Toronto/Vancouver March Ahead
the fastest pace of homebuilding since 2007. for this measure. RPS composite house prices, Jan 2015=100, SA
The August increase was primarily driven by House price 190
multifamily starts, with urban multifamily trends generally have 180 Toronto Vancouver
starts up 27% on a year-ago basis. Urban sin- held up since March 170 Montreal Calgary
160 Edmonton Ottawa
gle-family starts are rising but are still down despite the plunge in
150 13-metro composite
12% on year-ago basis. home resale activity
140
Multifamily starts are seeing a relatively as supply fell in tan-
130
stronger recovery mainly because projects dem. House prices
120
that were planned before the crisis are con- continue to rise with 110
tinuing given the development and planning the RPS 13-met- 100
costs. Builders have spent too much money ro area transac- 90
on the projects to abandon them. This is par- tion-weighted com- 15 16 17 18 19 20
ticularly true for large multifamily ventures. posite house price Sources: RPS, Moody’s Analytics
Presentation Title, Date 5
MOODY’S ANALYTICS Canada Housing Market Outlook: Housing Market Weathers the Storm, but the Pandemic Will Eventually Take a Toll 3second quarter was mainly because of higher they have been hit by the double whammy ket conditions. According to the Real Estate
disposable incomes and lower mortgage of COVID-19 and lower oil prices. Transac- Board of Greater Vancouver, home resales
rates which more than offset the increase in tion-weighted composite house prices de- jumped 37% from a year ago while invento-
house prices. clined in Calgary by 0.6% and in Edmonton ries are slightly above 4 months—well below
by 2.1% in August, reflecting the uncertainty their 10-year average.
Regional disparity in the energy sector. The housing markets were mixed in the
House price appreciation remains re- In a stark contrast to the Prairies, the Atlantic metro areas. House prices in Saint
gionally asymmetric and will likely stay that housing market is tight in Ontario. Accord- John and St. John’s declined at an increasing
way. Chart 5 shows the asymmetry of RPS ing to the Canadian Real Estate Associa- pace while the pace of appreciation strength-
transactions-weighted composite indexes tion, several Ontario markets shifted from ened in Moncton and Halifax. Housing starts
for the six largest metro areas and the RPS months of inventory to weeks of inventory in the Atlantic provinces slowed in August but
13-metro area composite index. House price in July. The recovery in residential starts has were at a solid level by historical standards.
dynamics have not changed much over the been striking in Ontario, mostly driven by
past six months. Montréal and Ottawa still multifamily construction. Policymakers’ response
show steady appreciation, while Calgary and As per the Toronto Regional Real Estate Though Canada’s public health measures
Edmonton have been pulling down on the Board’s latest report, home resales jumped took a toll on the economy, they have been
13-metro area composite index. The national 40.3% from a year ago, largely because of proving effective at minimizing the number
composite house price index is heavily influ- strong sales of low-rise homes while new and of new coronavirus infections, even as re-
enced by sales in Toronto and Vancouver— active listings were up on a year-ago-basis. strictions on social activities were relaxed.
two of Canada’s most active and expensive House prices in the Toronto metro area rose For now, the trend in the daily number
housing markets. The indexes for Toronto and by about 10% on a year-ago basis throughout of new infections is holding below 500,
Vancouver recorded the largest 10-year price the COVID-19 crisis. about a quarter of its late-April/early-May
appreciation despite their policy-induced Ottawa and Montreal have had the hot- peak and barely above its late-June shut-
slowdown in 2017-2018 and have been gain- test housing markets in Canada for the last down-induced low.
ing traction since mid-2019. few years. Market conditions are extremely The BoC is deploying extraordinary mea-
No province or metro area was immune tight because of robust sales activity and sures to maintain the normal functioning of
to the historically sharp downturn, but the low inventories. House prices in Ottawa credit markets and stimulate economic activ-
performance of the housing market is di- are up by about 12% on a year-over-year ity, far surpassing the steps taken in 2008.
vergent. Provinces dependent on the energy basis while Montreal house prices are up In total, the bank’s balance sheet has
sector—notably Alberta and Saskatche- by 7.5%. New-home markets in Toronto, swelled from C$120 billion to nearly C$550
wan—were already dealing with soft market Ottawa and Montreal remain relatively billion, a nearly fivefold increase. Policy-
conditions. New single-family homes show tight and have not seen any increase in makers will not start raising rates until the
dangerous signs of excess supply in Calgary unabsorbed inventory. recovery is well underway. This suggests that
and Edmonton. The share of first mortgages In contrast, the pace of price appreciation a move will not come before 2023.
in arrears is also much higher for the Prai- for condo apartments in Toronto, Ottawa and In addition, Canada’s largest banks
ries than for Canada while housing starts Montreal slowed in the last few months (see and many other lenders have announced
are almost one-third below their year-ago Chart 6). The recent softness in the rental that borrowers struggling because of the
levels, mainly due to elevated inventories market in these three markets is in part due COVID-19 crisis will be able to defer their
of unsold new units in Alberta. And now to weaker immigration. mortgage payments for up to six months.
Vancouver con- And the Office of the Superintendent of
tinues to have the Financial Institutions has suspended a
Chart 6: Condo Market Plateaus lowest affordability change to its mortgage stress test that
in the nation, fol- could have lowered the benchmark used
RPS condo apartment prices, Jan 2017=100, SA
lowed by Victoria to determine the minimum qualifying rate
160
Toronto Vancouver and Toronto. Though for borrowers with down payments of more
150 Montreal Calgary
Edmonton Ottawa affordability is still than 20%.
140 13-metro composite a concern for these Last, the government has extended the
130 metro areas, it is no Canada Emergency Response Benefit pay-
120 longer deteriorating. ments to the end of 2020. A massive and
110 House prices in Van- mounting monetary and fiscal policy response
100 couver have been ris- is helping many households navigate the
90 ing since last summer storm; despite an approximately 9% decline in
80 and are now above compensation of employees—wage and salary
17 18 19 20 their year-ago levels income—disposable income surged nearly 11%
Sources: RPS, Moody’s Analytics thanks to tight mar- in the second quarter (see Chart 7).
Presentation Title, Date 6
MOODY’S ANALYTICS Canada Housing Market Outlook: Housing Market Weathers the Storm, but the Pandemic Will Eventually Take a Toll 4Chart 7: Stimulus Drives Disposable Income Chart 8: Housing Won’t Escape Unharmed
% change yr ago RPS house price, by forecast vintage, 2020Q2=100
30 150
25 Wage and salary income
140 Sep baseline Sep S1 Sep S3 Sep S4
Disposable income
20 130
Saving rate
15 120
10 110
5 100
0 90
-5 80
-10 70
17 18 19 20 15 16 17 18 19 20F 21F 22F 23F 24F 25F
Sources: Statistics Canada, Moody’s Analytics Sources: RPS, Moody’s Analytics
Presentation Title, Date 7 Presentation Title, Date 8
Housing outlook income will restrain buyers’ return to the macroeconomic and house price forecasts
The fiscal stimulus measures and mort- market. So will affordability issues in Vancou- for Canada.
gage deferrals combined with low interest ver and Toronto. Further, slower in-migration House prices are set to fall from their cur-
rates and Canada’s strong demographics flows to Canada due to COVID-19 disruptions rent levels nationally. However, the speed of
have kept Canada’s housing market marching will weigh on housing demand. Not even the drop and recovery will vary considerably
ahead throughout the COVID-19 crisis. lower interest rates will be enough to save across provinces. The Prairie provinces are the
Moody’s Analytics expects that the short- the housing market. most vulnerable (see Chart 9). The collapse
lived burst of growth in the third quarter will Moody’s Analytics expects Canadian in oil prices will only deepen and prolong
produce too few job gains to meaningfully house prices to suffer a peak-to-trough de- the economic hardship for the oil-producing
reduce unemployment. Joblessness will still cline of about 7% under our September base- provinces. The impact on the Calgary and Ed-
slightly exceed 9% by year’s end. line scenario (see Chart 8). Building permits monton housing markets will last longer than
The recovery is expected to lose mo- softened in July, portending some easing in for the rest of the nation.
mentum through the first half of 2021 as the pace of homebuilding in the near term. Housing affordability is still a big issue in
the U.S. economy stalls, the boost from Housing starts are forecast to decline to Vancouver and Toronto, but the COVID-19
stimulus fades, and credit problems crop 151,000 annualized units by the third quarter pandemic and economic turmoil will draw
up. Growth will regain momentum in the of 2021, compared with 206,000 in the first more attention to it in the near term. House
second half of 2021 as positive vaccine de- quarter of 2020. prices continue to rise in both metro ar-
velopments boost confidence and lockdown Fortunately, the declines will be brief and eas. However, the pace of appreciation has
restrictions ease. the restoration of robust job growth in 2022 slowed in the condo apartment market.
The housing market will no longer be able along with Canada’s strong demographics Rental vacancy rates will rise in Toronto and
to escape the poor condition of the labor will put a floor under the housing market Vancouver as an increased supply of rental
market as vacancy and delinquency rates which mitigates the degree of the declines. units coincides with a fall in demand due to
rise in 2021. High unemployment and lower Table 1 provides current Moody’s Analytics disruption of migration to Canada.
Table 1: Canada Housing Market, History and Baseline Forecast
Most recent,
2018 2019 2020 2021 2022 2023 2024 2025
Q2*
Detached single-family house price index, % change 7.08 1.50 1.42 5.65 -6.72 4.64 7.49 6.73 5.78
Condo apartment price index, % change 6.18 9.13 3.32 4.75 -6.52 3.67 6.25 5.65 4.82
Composite house price index, % change 7.11 2.22 1.44 4.25 -10.2 4.18 8.29 7.74 6.09
Real per capita disposable income, % change 12.43 0.62 1.33 4.33 -2.09 1.73 1.1 0.87 1.19
Unemployment rate, % 13 5.83 5.67 9.65 8.56 7.5 6.87 6.7 6.68
Avg mortgage rate, 5-yr, % 3.86 4.36 4.25 3.64 3.31 3.91 4.58 5.23 5.61
Housing starts, ths 192.67 214.16 208.55 208.26 162.98 181.93 191.63 171.27 161.53
% change -11.77 -2.92 -2.62 -0.14 -21.74 11.62 5.33 -10.63 -5.69
Ratio, median dwelling price/median family income 8.64 8.02 7.93 8.41 7.44 7.5 7.82 8.18 8.43
Ratio, outstanding mortgage debt/disp. income 1.04 1.16 1.15 1.11 1.09 1.02 0.98 0.96 0.94
*yr over yr
Sources: RPS, Statistics Canada, CMHC, Moody’s Analytics
MOODY’S ANALYTICS Canada Housing Market Outlook: Housing Market Weathers the Storm, but the Pandemic Will Eventually Take a Toll 5Chart 9: Downturn Will Be Uneven Chart 10: Disparity Within Toronto Metro
RPS HPI, forecast peak-to-trough decline, %, Sep vintage RPS composite house prices, Jan 2015=100, SA
Calgary 180
Edmonton 170
Regina
Toronto 160
Victoria 150
Quebec 140
Winnipeg
Canada 130
Saskatoon 120
Vancouver 110 Toronto CMA Mississauga Oshawa
Montreal 100
Halifax Pickering Markham
Hamilton 90
Ottawa 80
-11 -10 -9 -8 -7 -6 -5 -4 -3 -2 15 16 17 18 19 20F 21F 22F 23F 24F 25F
Sources: RPS, Moody’s Analytics Sources: RPS, Moody’s Analytics
Presentation Title, Date 9 Presentation Title, Date 10
We expect greater resilience in low- alytics expects that housing prices will start this fall and winter could spur a greater than
er-density markets outside Canada’s large meaningfully recovering in early 2022. expected decline in house prices.
urban cores. The pandemic has boosted de- The development and broad deployment
mand for properties offering more space for Risks of a highly effective coronavirus therapy or
working from home and fewer shared areas The marks of the Great COVID Crisis of vaccine remains the greatest wild card in the
with neighbors. Smaller markets where 2020 will be felt for years to come. Not only forecast. If a vaccine is delayed, then so too is
such properties are more affordable will will the effects of the economic shocks to em- the timing of the recovery.
particularly benefit from this trend. Trends ployment and income take years to be fully ab- The pandemic will lead to even further
may diverge even within urban cores, where sorbed, but consumer preferences have perma- widening in economic inequality, including
the condo segment’s prospects could be nently changed as a result of the health scare. housing. In the long run, the housing market
adversely affected by a drop in immigra- The risks to the baseline forecast are weighted will depend on several factors, including con-
tion. In Chart 10, we see the asymmetry in decidedly to the downside because of the nu- sumer preferences for homeownership and
the forecasts across different subdivisions merous unknowns related to COVID-19. the ability of families to save for a down pay-
of the Toronto metro area. House prices The impending arrival of winter raises ment. While demand for single-family homes
in Oshawa rose at a faster pace because concerns that a return to indoor activities will with ample space and large pantries may rise,
of higher house prices and lack of space in exacerbate the spread of the virus. A second so too might demand for smaller apartments
areas such as Mississauga, and we expect leg downward in the labor and financial mar- and condos given the struggle many families
the trend to continue. Overall, Moody’s An- kets caused by a renewed wave of COVID-19 will face in saving for a down payment.
MOODY’S ANALYTICS Canada Housing Market Outlook: Housing Market Weathers the Storm, but the Pandemic Will Eventually Take a Toll 6About the Author Abhilasha Singh is an economist at Moody’s Analytics, where she leads model development, validation, and forecasting for global subnational economies. She is responsible for coverage of emerging markets as well as U.S. and metropolitan area economies. She is also a regular contributor to Economic View. Abhilasha completed her PhD in economics at the University of Houston, where she taught microeconomics. She holds a master’s degree in finance from Pune University in India. MOODY’S ANALYTICS Canada Housing Market Outlook: Housing Market Weathers the Storm, but the Pandemic Will Eventually Take a Toll 7
About RPS Real Property Solutions RPS Real Property Solutions is a leading Canadian provider of outsourced appraisal management, mortgage-related services, and real estate business intelligence to financial institutions, real estate professionals, and consumers. The company’s expertise in network management and real estate valuation, together with its innovative technologies and services, has established RPS as the trusted source for residential real estate valuation services. RPS is wholly owned by Brookfield Business Partners L.P., a public company with majority ownership by Brookfield Asset Management Inc. Brookfield Business Partners L.P. is Brookfield’s flagship public company for its business services and industrial operations of its private equity group, which is co-listed on the New York and Toronto stock exchanges under the symbol BBU and BBU.UN, respectively. Brookfield Asset Management Inc. is a Canadian company with more than a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity. Brookfield is co-listed on the New York, Toronto and Euronext stock exchanges under the symbol BAM, BAM.A and BAMA, respectively. More information is available at www.rpsrealsolutions.com. About the RPS – Moody’s Analytics House Price Forecasts The RPS – Moody’s Analytics House Price Forecasts are based on fully specified regional econometric models that account for both housing supply-demand dynamics and long-term influences on house prices such as unemployment and changes in mortgage rates. Updated monthly and providing a 10-year forward-time horizon, the forecasts are available for the nation overall, its 10 provinces and for 33 metropolitan areas, and cover three property style categories, comprising single-family detached, condominium apartments and aggregate, in a number of scenarios: a baseline house price scenario, reflecting the most likely outcome, and six alternative scenarios.
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Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys. com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.” Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corpora- tions Act 2001. 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(“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody’s Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
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