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Residential Mortgage Quarterly Review - Q1 2018

May 3, 2018
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First National Financial LP

The first quarter of 2018 saw a significant softening of the Canadian real estate market.  Sales activity slowed notably, compared to a year earlier, and price acceleration continued to moderate.  Still, it was not enough for Canada Mortgage and Housing Corporation to improve its assessment of the country’s housing market.

CMHC Still Waving the Red Flag

For the seventh straight quarter the federal housing agency is waving the red flag, saying there is a high degree of vulnerability to market instability in the Canadian housing sector.  CMHC’s first-quarter Housing Market Assessment for 2018 is virtually unchanged from the fourth quarter of 2017.

Hottest Markets, Highest Risk

The country’s four hottest markets – Vancouver, Victoria, Toronto and Hamilton – continue to present the highest risks, driven by overvaluation.  Overvaluation is deemed to occur when home prices outpace the economic fundamentals, like income and population growth, that would normally support them.  Hamilton did slip into the moderate risk category but that did not change its overall, high risk rating.

Moderation on the Prairies

Four major prairie cities – Calgary, Edmonton, Regina and Saskatoon – were all red-flagged for overbuilding but their overall risk ranking was held a moderate.

Montreal on Notice

Montreal remained in the low risk category along with Quebec City, Ottawa, Halifax, St. John’s and Winnipeg.  But CMHC has warned that Montreal’s status could be up for review due to a spike in sales activity.

CREA Makes some Adjustments

Unlike CMHC the Canadian Real Estate Association has made some adjustments in its quarterly forecast.  

When CREA published its last forecast, in December 2017, the country’s realtors were bracing for the impact of the new, federally mandated stress test on non-insured mortgages.  At the time there was an expectation that buyers would pull forward their purchases in order to avoid the January 2018 implementation of the new rules.

By CREA’s reckoning, that happened in spades.  Seasonally-adjusted, national sales figures show December 2017 broke all previous records for the month.  Then sales plunged in Q1 of this year. 

Higher Rates and More Rules Coming

CREA is now looking to the rest of 2018 with a view to the uncertainty caused by continuing interest rate increases and additional market-cooling regulations coming in British Columbia.

With that in mind, the association does not expect to see any kind of a rebound in the market until the second half of the year.  It sees overall sales coming in at a little more than 479,000 units, a 7.1% decline.  It sees a national average price of $498,000 for 2018, down 2.3% from 2017.  These figures are skewed by the number of sales in B.C. and Ontario and the volume of high-priced sales in Vancouver and Toronto.

Better but modest gains in 2019

The view to 2019 is somewhat more optimistic but remains moderate.  Sales are expected to climb to 496,500 but that is remains below levels for 2015, 2016 and 2017.  The national average price is forecast to rise by about 3% to $513,000 – returning it to roughly the same level as 2017.  Once again the numbers will be dictated by what happens in B.C. and Ontario.