First National Financial LP

Residential Mortgage Quarterly Review

  • First National Financial LP

The latest indicators from Canada Mortgage and Housing Corporation suggest the country’s housing market has stabilized but there are pockets of concern.  The agency has held its overall market vulnerability rating at moderate for the fourth consecutive quarter.  Canada’s realtors continue to build on optimism triggered by a surge in the second half of 2019.

Key concern: overvaluation

The key factor for CMHC is a persistent, although moderate, risk of overvaluation.  The agency’s latest Housing Market Assessment maintains that economic fundamentals like population growth and falling mortgage rates continue to support rising prices.  However, it says, the inflation-adjusted increases in the market are higher than the fundamentals warrant.

The law of supply and demand

The slight imbalance between the fundamentals and the real market appears to be the result of simple supply and demand.  With modest declines in interest rates, the new First-Time Homebuyer Incentive and consumers adjusting to the government stress-tests, demand remains strong.  However, the Canadian Real Estate Association says that the sales-to-new-listing ratio remains flat.

CREA reports that the resale housing inventory has been stuck at 4.2 months for the past three months.  That is the lowest level in about 13 years, and a full month below the long-term average of 5.2 months.

CMHC says the evidence of price acceleration remains low, but the decline in inventory appears to support CREA’s prediction that a lack of housing supply will likely tip the market in favour of sellers and drive prices higher.  This spring’s “housing season” could set the tone for the rest of the year.

Ongoing concerns

CMHC continues to point to overvaluation, price acceleration and overheating as persistent worries in Vancouver, Hamilton, Toronto and Montreal.  But the agency’s concerns are not big enough to merit raising risk levels in those markets.  All are deemed to have moderate vulnerabilities, except Montreal which remains low.  Right now, the only market ranked with high vulnerability is Victoria, where price acceleration and overvaluation are ongoing concerns.

Solid price growth

Canada’s realtors are looking forward to solid price growth for 2020.  CREA is forecasting a national average increase of 6.2% – not the stratospheric gains seen in recent years, but still well above the rate of inflation.

The Association projects the national average home price will hit $531,000 for 2020.  As always, that figure is heavily influenced by the Greater Golden Horseshoe Area, in Ontario, and the Greater Vancouver Area.  With those two regions taken out of the calculation you can expect to see the national average drop by about $100,000.

A new variable

All of these numbers were compiled prior to the mid-February announcement of changes to the insured mortgage stress test.  Those changes, which will see an easing of the qualifying rate, take effect in April.

It remains to be seen what the changes will do to the market but, again, the spring buying season could be a bellwether for the rest of the year.