Canadian Housing: Loving, Not Listing
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It’s shaping up to be a fascinating spring in Canadian housing. Demand is still depressed by high mortgage rates, with sales in Toronto, Vancouver and Calgary each down roughly 40% from a year ago. But, the Bank of Canada’s telegraphed rate-hike pause has been a support for market psychology. That, along with a drop in fixed mortgage rates, has given some buyers the confidence that the worst is over. But, the real story shaping this cycle is playing out on the supply side. That is, few are selling.
New listings in the Toronto market saw the weakest monthly flow for any March in 22 years, ordinarily a month that sees a significant seasonal jump (new listings typically rise further in April and then peak in May). Even if demand is only improving incrementally off the bottom, the lack of new listings is quickly tightening markets in many areas of Canada. Why are so few selling? Here are some possible explanations:
They don’t want to sell into a down market. With prices down almost 20% from their high nationally, and more in some markets, many might simply be holding out for better market conditions, especially if the longer-term bullish consensus on housing remains intact. Meantime, while some mortgages can be ported, the cost of moving or trading up might be excessive in this rate environment, and many might be holding fort to see how it shakes out.
They don’t have to sell. This might be the defining feature of this housing cycle if it holds, setting it in stark contrast to those in the U.S. during the 2008/09 downturn, and Southern Ontario in the early 1990s. Why?
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This is an asset price correction only so far, where excessive froth has been scraped off the market by higher interest rates. That’s a lot different than a market pulled down by recession, job loss and mortgage delinquencies, which we see none of yet. Heading into the second quarter, Canada’s job market still looks drum tight.
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A major buffer is built into the mortgage market. While roughly 20% of the outstanding mortgage market was taken on with variable rates around 1.5%, the move north of 6% hasn’t triggered immediate payment stress because the vast majority of those are seeing amortizations stretch out, rather than payments skyrocket. To be sure, if payments were rising across the board in real time, we’d probably be seeing much more stress.
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OSFI has stress-tested most buyers. Even those that took out mortgages with 1.5% rates at origination, from a federally-regulated institution, were stress tested in the 4.75%-to-5.25% range (and higher as rates rose). In theory, their capacity to service higher rates has already been proven, again limiting any forced selling.
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Investors have a strong rental market to fall back on. No doubt there are many recent investors in a negative equity position right now. Cash flow dynamics are going to vary considerably based on when an investor bought and the type of mortgage they have, but almost all regions of the country have very tight rental markets. If given a choice to swallow a 20% capital loss, or rent and wait it out, many might be doing the latter.
All told, Canadian home prices are down almost 20% from their high, with some areas seeing deeper corrections; so far, right in line with what we’ve expected. Supply-side dynamics are now helping to put a floor under the market, and we’ll be watching the economy and job market closely to see if this floor holds.
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Robert Kavcic
Director and Senior Economist
Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing economic, fiscal and real estate trends in Canada. Robert regularly contribut…(..)
View Full Profile >It’s shaping up to be a fascinating spring in Canadian housing. Demand is still depressed by high mortgage rates, with sales in Toronto, Vancouver and Calgary each down roughly 40% from a year ago. But, the Bank of Canada’s telegraphed rate-hike pause has been a support for market psychology. That, along with a drop in fixed mortgage rates, has given some buyers the confidence that the worst is over. But, the real story shaping this cycle is playing out on the supply side. That is, few are selling.
New listings in the Toronto market saw the weakest monthly flow for any March in 22 years, ordinarily a month that sees a significant seasonal jump (new listings typically rise further in April and then peak in May). Even if demand is only improving incrementally off the bottom, the lack of new listings is quickly tightening markets in many areas of Canada. Why are so few selling? Here are some possible explanations:
They don’t want to sell into a down market. With prices down almost 20% from their high nationally, and more in some markets, many might simply be holding out for better market conditions, especially if the longer-term bullish consensus on housing remains intact. Meantime, while some mortgages can be ported, the cost of moving or trading up might be excessive in this rate environment, and many might be holding fort to see how it shakes out.
They don’t have to sell. This might be the defining feature of this housing cycle if it holds, setting it in stark contrast to those in the U.S. during the 2008/09 downturn, and Southern Ontario in the early 1990s. Why?
-
This is an asset price correction only so far, where excessive froth has been scraped off the market by higher interest rates. That’s a lot different than a market pulled down by recession, job loss and mortgage delinquencies, which we see none of yet. Heading into the second quarter, Canada’s job market still looks drum tight.
-
A major buffer is built into the mortgage market. While roughly 20% of the outstanding mortgage market was taken on with variable rates around 1.5%, the move north of 6% hasn’t triggered immediate payment stress because the vast majority of those are seeing amortizations stretch out, rather than payments skyrocket. To be sure, if payments were rising across the board in real time, we’d probably be seeing much more stress.
-
OSFI has stress-tested most buyers. Even those that took out mortgages with 1.5% rates at origination, from a federally-regulated institution, were stress tested in the 4.75%-to-5.25% range (and higher as rates rose). In theory, their capacity to service higher rates has already been proven, again limiting any forced selling.
-
Investors have a strong rental market to fall back on. No doubt there are many recent investors in a negative equity position right now. Cash flow dynamics are going to vary considerably based on when an investor bought and the type of mortgage they have, but almost all regions of the country have very tight rental markets. If given a choice to swallow a 20% capital loss, or rent and wait it out, many might be doing the latter.
All told, Canadian home prices are down almost 20% from their high, with some areas seeing deeper corrections; so far, right in line with what we’ve expected. Supply-side dynamics are now helping to put a floor under the market, and we’ll be watching the economy and job market closely to see if this floor holds.
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