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Residential Mortgage Quarterly Review - Q4 2017

Feb 5, 2018
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First National Financial LP

"May you live in interesting times": that expression is often deemed to be a curse and it appears 2018 is shaping up to be “interesting” in the housing market, at least at the outset.

Off to a Bumpy Start

The Canadian Real Estate Association is expecting an unsettled start to the year.  The more stringent stress test for mortgage borrowers and other new rules, put in place by the Office of the Superintendent of Financial Institutions, have the association forecasting a slowdown in sales activity through the first half of 2018.

In its last report CREA forecast a 5.3% drop in sales for 2018.  That is a further decline from its already reduced forecast for 2017 sales.  The association trimmed its 2017 outlook by 4% in December.  It expects national sales to total 486,600 units in 2018, down 27,000 from 2017 and 8,500 fewer than in CREA’s previous forecast.

Fears of a “Pull Forward”

A key concern for the realtors was a “pulling forward” of business into the last quarter of 2017 from the first quarter of 2018, triggered by the new rules which took effect on January 1, 2018.  Based on the association’s December figures, this fear appears to have been borne out.

The last month of 2017 saw sales surge 4.5% compared to November 2017.  Year-over-year, December sales were up 4.1%.  New listings popped by 3.3% month-over-month.  Prices, as measured by the MLS Home Price Index, gained 9.1% y/y in December, but that marks an on-going deceleration of price appreciation.

The Big Markets Maintain Their Big Influence

The Toronto and Vancouver regions continue to hold sway over CREA’s statistics.  The average national home price is forecast to slip by 1.4%, to $503,000.  That is based on a 2.2% decline in Ontario which is, in turn, is based on the expectation that record setting sales of high-priced Toronto-area homes in 2017 will not be repeated in 2018.  Prices are expected to hold steady in British Columbia.

CREA sees the new OFSI rules weighing on sales right across the country, particularly in the higher priced segments of the market.  None the less it expects to see prices rise in Quebec, New Brunswick and Nova Scotia.  The energy dependent provinces Alberta, Saskatchewan and Newfoundland and Labrador are expected to see no movement or slight declines.

CMHC Still Waving a Red Flag

Canada Mortgage and Housing Corporation continues to see a high risk of vulnerability in Canada’s housing market.  And, like the realtors, the housing agency is being influenced by Toronto and Vancouver.

Overvaluations & Overbuilding are Big Concerns

Both of the big markets are causing concerns due to overvaluation.  In Toronto (and Hamilton) that is in spite of an easing of market conditions.  The cities in the Greater Golden Horseshoe Area, of Ontario, are showing price acceleration that is not supported by demographic or economic fundamentals.  In Vancouver there are further concerns about overheating and price acceleration that are not supported by demographic and economic fundamentals.  Victoria remains highly vulnerable due to overpricing, driven by tight supply.

Saskatoon lingers on the list of highly vulnerable cities due to moderate evidence of overvaluation and strong evidence of overbuilding.  Overbuilding has become a key concern in Calgary, Edmonton and Regina but the cities are listed as showing just moderate evidence of vulnerability.  While there is moderate evidence of overbuilding in the eastern energy city of St. John’s, Newfoundland, its overall risk of vulnerability remains low.

Ottawa, Montreal, Quebec City, Moncton and Halifax are all ranked as low risk.