First National Financial LP

Residential Mortgage Quarterly Review - Fall 2021

  • First National Financial LP

Canada Mortgage and Housing Corporation has once again raised a red flag over the country’s housing market.  At the same time, Canada’s realtors see a return to more normal conditions albeit with much tighter supply.

Risk moves to high

CMHC’s latest Housing Market Assessment has moved the market’s overall vulnerability to high, from moderate, based in large part on the risks associated with price acceleration and overvaluation.

The HMA, which is now released bi-annually rather than quarterly, looks at four key factors – overheating, price acceleration, overvaluation and excess inventories – in an effort to identify imbalances that could increase the risks for a housing market downturn.

Supply tight as fundamentals improve

Like the country’s realtors CMHC sees market fundamentals improving.  But both organizations point to a lack of supply as the main culprit in unprecedented price acceleration and the overvaluation of properties.  CMHC suggests that exceptionally high demand and the increasing rate of price growth “may have contributed to irrational expectations of continued price growth and, in turn, more buyers entering the market than was warranted.”

“House price growth significantly outpaced growth in house prices supported by fundamentals between the 4th quarter of 2020 and the 2nd quarter of 2021,” the agency says in its report.

The federal housing agency suggests this is especially the case in several local markets in Ontario and Eastern Canada, in particular Toronto and Montreal.

The Canadian Real Estate Association sees price acceleration and overvaluation as extensions of a trend that started several years ago, which has been exacerbated by market shifts brought on by the pandemic.

Calm is coming

In its latest quarterly report CREA says its market indicators are leveling-off somewhere between pandemic highs and pre-pandemic levels.  But it points out that inventories, that were at a 14-year low prior to the outbreak, remain at all-time lows.  The realtors also expect that the normalization of economic conditions like employment growth and immigration will drive a continuing demand for homes even as supply remains tight.

CREA’s September report puts the sales-to-new listings ratio at 72.4% with just 2.2 months of inventory.

The association is forecasting that a record-setting 656,300 properties will change hands this year, a 19% increase over 2020.  It expects the national average home price will rise by 20% on an annual basis to $680,000 in 2021.

Looking ahead to 2022, CREA sees the market slowing down, with a return to pre-pandemic levels.  It expects sales to pull back to about 577,000 units with the rate of price increase dropping below 6.0%, for a national average of about $718,000.