Home Prices Up 17% in September, But Some Signs of Cooling Emerge

The average home price in Canada surpassed $600,000 for the first time ever in September and home sales jumped nearly 46% compared to a year ago.

But, beneath the headline-grabbing details from the Canadian Real Estate Association’s latest housing report, there were some underlying signs of cooling.

But first, here’s a rundown of September’s stats:

• MLS home sales: Up 45.6% year-over-year
• Average national sale price: $604,000, up 17.5% from a year ago
  • Removing the high-priced markets of the Greater Toronto and Vancouver areas, the average sale price was $479,000, still up by more than 20%
• Months of housing inventory: 2.6 months
  • This is how long it would take to liquidate current inventories at the current sales rate.
  • This is unchanged from August, and a record low

“This is starting to sound like a broken record (about records being broken), but Canadian home sales and prices set records once again in September amid record-tight overall market conditions, as they did in July and August,” Shaun Cathcart, CREA’s senior economist, said in a release. “Reasons have been cited for this – pent-up demand from the lockdowns, Government support to date, ultra-low interest rates, and the composition of job losses to name a few.”

Cathcart noted that records were in the process of being broken at the start of the year, pre-COVID, due to record-tight overall market conditions.

“But I think another wildcard factor to consider, which has no historical precedent, is the value of one’s home during this time,” Cathcart added. “Home has been our workplace, our kids’ schools, the gym, the park and more. Personal space is more important than ever.”

Here’s a look at how some regional and local housing markets performed in September:

• New Brunswick: $226,659 (+31.4%)
• Ottawa: $529,900 (+22%)
• Halifax: $381,792 (+19%)
• Greater Montreal Area: $413,000 (+15.5%)
• Greater Toronto Area: $897,700 (+11.6%)
• Winnipeg: $286,600 (+7.1)
• Greater Vancouver Area: $1,041,300 (+5.8%)
• Victoria: $716,800 (+3.3%)
• Calgary: $415,200 (-0.3%)

Signs of Cooling

Despite the headline-grabbing results, there were some segments of the market where growth was more muted.

Newly listed homes were down 10.2%, reversing the rise to record levels in August. CREA reported that new supply of homes was down in two-thirds of local markets, led by declines in the Greater GTA and GVA markets.

The single-detached home segment continued to show the most strength, with the Home Price Index showing a 12% year-over-year gain. Condo gains, on the other hand, rose by about half, 6.2%. Condo prices have mostly flattened in the Toronto, Vancouver and Hamilton markets to pre-pandemic levels, CREA added.

Reaction to September’s Housing Market

Many analysts, who had initially forecast a cooling of the housing market by now, continue to call for a slowdown in activity in the coming quarters.

“Several factors explain the stunning strength in sales observed in recent months, including low borrowing costs, the relative mix of employment/income losses, and the release of pent-up demand after a muted spring selling season,” noted TD economist Rishi Sondhi.

“The question now becomes whether this momentum is sustainable. In our view, home sales are set to cool from their unsustainable third-quarter pace over the next few quarters.”

RBC’s Robert Hogue suggested that the coming months will provide more clarity as to the market’s direction in the year ahead.

“We’ll see whether low interest rates and changing housing needs can keep demand boiling hot, or whether the exhaustion of pent-up demand and plummeting immigration will cool things down,” he wrote. “We’ll also learn how many current homeowners will be in trouble once mortgage payment deferrals expire and are forced to sell.”

BMO’s chief economist Douglas Porter agrees that a cool-down is in the cards, despite the persistent strength the market has displayed to date.

“As one outfit put it, not even a global pandemic managed to knock the Canadian housing market off its game, and it’s doubtful that even a serious second wave would have much more impact,” he wrote. “Still, we doubt that this recent sizzling strength can persist amid some of the building headwinds, which should at least somewhat tame market conditions in the months ahead. The underlying economic conditions simply do not support such a piping hot market over a sustained period.”

Pandemic Has Increased Homebuying Intentions Among Young Canadians

There may be uncertainty on the horizon for the country’s real estate market, but young Canadians are undeterred and remain optimistic about the prospect of buying a home.

Nearly one in five young Canadians aged 18-34 say the pandemic has accelerated their plans to purchase a home or investment property, according to a recent Scotiabank survey.

Part of the reason can be attributed to the strain of recent lockdowns on those confined to smaller living spaces and wanting to upgrade to a larger or more functional living space.

“The pandemic has caused many Canadians to turn their living rooms into classrooms, their dining rooms into offices, and their basements into home gyms,” said John Webster, Head of Real Estate Secured Lending and Scotia Mortgage Authority at Scotiabank in a release. “This is motivating many to consider investing more in their current homes or re-evaluating their living spaces altogether.”

But, historically low interest rates seem to be the key driver behind this homebuying optimism. Despite soaring home prices, falling interest rates have helped keep homes within reach for many buyers.

Based on the average mortgage size of $289,000, according to Equifax Canada, today’s homebuyers could save more than $13,000 due to the recent plunge in interest rates compared to if they had purchased back in January.

That’s based on a nationally available uninsured 5-year fixed mortgage rate of 1.84% today vs. 2.84% at the start of this year. That works out to $142 in monthly mortgage savings, or $13,532 over the five-year term.

Even if today’s mortgage amount was increased to $299,000, those buying now would still come out ahead by $2,689 over the 5-year term with today’s lower rates.

Younger Canadians More Likely to Expect a Drop in Home Prices

Not only are prospective buyers counting on historically low interest rates, many believe home prices are set to fall as well.

One-third of those who say the pandemic has accelerated their homebuying plans say they are waiting for prices to drop before making a purchase.

The survey found the younger the demographic, the more likely they are to expect a forthcoming drop in house prices:

• 25% of overall respondents expect a drop in home prices, vs.
• 36% of those 18-34
• 24% of those 35-54
• 17% of those 55 and older

Additional Findings

The Scotiabank survey also found the following tidbits:

• 1 in 5 Canadians (20%) have had their finances negatively impacted by the pandemic and have had to put their homebuying plans on hold.
• 77% of renters say they have no plans to purchase a home in the next two years, despite low interest rates.
  • A recent Mortgage Professionals Canada survey made a similar finding, that 23% of renters expect to buy a home in the next two years.
• 12% of homeowners are planning to use the equity in the home to finance a renovation
  • 20% plan to use a personal line of credit
  • 22% to use funds from their investments
  • 3% plan to borrow from family or friends

–Steve Huebl

Latest in Mortgage News: CMHC to Get New Name, Maybe “Housing Canada”

What’s in a name? Well, in the case of the Canada Housing and Mortgage Corporation, “mortgage” likely won’t be for much longer.

The housing agency announced last week that it will be undergoing a rebranding in the coming months to better reflect its mandate. CEO Evan Siddall says the current name overemphasizes homeownership financing and doesn’t highlight the agency’s work related to housing affordability.

The name “Housing Canada” has already been floated, but federal legislation would be needed for an official name change. However, in an interview with The Canadian Press, Siddall said the agency could simply use a trade name.

He added that now is the time to look at such a name change that would better align the organization’s present and future.

“People always talk about the current moment as being an inflection point,” he said. “There’s a moment now that policy-makers are reflecting on and we’ll see what happens in the coming weeks and months, but this is for sure a moment like that.”

Home Affordability Improved in Q2

Canada’s large urban centres became more affordable in the second quarter of 2020, according to National Bank’s Housing Affordability Monitor.

That follows deteriorating affordability in the two previous quarters. The improvement is attributed to higher incomes and, more importantly, lower interest rates.

“[Interest rates] declined 19 basis points in the quarter, reflecting the easing from the central bank,” reads the report. “Combined, income and mortgage rates were more than enough to offset the increase in home prices”

NBC notes that the quarterly data doesn’t capture the full extent of the decline of 5-year fixed rates seen throughout the pandemic.

“Looking ahead, the preliminary data for rates shows additional improvements in the third quarter of the year (cumulatively they are down over 70 bps),” the report notes. “While we expect this to help affordability, home prices should remain resilient based on the latest resale market data showing record sales volumes.”

Homeowner Sentiment Improving, MPC Survey Shows

As economic and housing market indicators have improved over the past couple of months, so too has homeowner sentiment.

The second in a series of four surveys conducted by Mortgage Professionals Canada has found improvements in homeowner confidence in August compared to July.

For one, the survey noted an increase in the percentage of non-owners who expect to purchase a home in the coming year, from 7% as of year-end 2019 to 16% in August. Similarly, there was a substantial drop in non-owners who said they would never purchase a home, from 32% at the end of 2019 to 19% in August.

Optimism in the economy in the coming 12 months and the percentage of those who agree Canadian real estate is a good long-term investment both increased since July, the report found.

“We’re encouraged by the new survey data, which indicated that confidence in the housing sector improved during July and August,” said Paul Taylor, President and CEO of MPC. “As many Canadians become more comfortable with our new business operating environments, optimism about future economic activity appears to be buoying housing market activity and expectations for future purchases.”

The latest survey also found an increase in homeowners who believe now is a good time to buy a home or condominium (with an average rating of 6.18 in August, up from 6.05 in July and 5.82 at year-end 2019). A score of 8-10 signifies strong agreement and a score of 1-3 signifies strong pessimism.

Consumers are also more likely to expect a rise in home prices since July (with an average score of 6.46 vs. 5.94 in July).

–Steve Huebl

Big Banks Still Dominate Mortgage Market Share, Says CMHC

Big banks originate nearly 7 out of 10 (67%) of new Canadian mortgages, although their market share has fallen slightly from last year, according to CMHC.

Of total mortgages outstanding, the big banks hold 72% of those loans, down from 75% in 2018, according to the latest Residential Mortgage Industry Report released by the Canada Mortgage and Housing Corporation (CMHC).

Their average loan in 2019 was $220,650, with interest rates ranging from 3.10% to 5.20% and a delinquency rate of 0.24%.

Mortgage Finance Companies (MFCs) dominate the insured mortgage space after the larger lenders, holding 20% of the market, followed by 12% for credit unions.

Of total mortgages outstanding, MFCs have 9% of the market share, with average mortgage loans of $247,828 and a delinquency rate equal to that of the big banks at 0.24%.

Credit unions hold 14% of outstanding mortgages, with smaller loan amounts averaging $156,817 and a lower delinquency rate at 0.17%.

Private lenders and mortgage investment corporations (MICs) hold just 1% market share and reported average interest rates of between 7% and 15% with an average delinquency rate of 1.73%.

$1 Billion in Monthly Mortgage Deferrals

CMHC also reported that Canadians have deferred a total of $1 billion per month since the height of the pandemic.

“This significantly reduces the influx of payments toward outstanding mortgage debt and is expected to contribute to increasing the total mortgage debt in the second and third quarters of 2020,” CMHC noted.

The calculation was made based on an average monthly payment of $1,333.

“…we also expect fewer mortgage borrowers will be making additional mortgage payments this year in order to accelerate their mortgage repayments (through lump-sum payments or accelerated repayments),” CMHC added.

About 20% of borrowers said they plan on making prepayments to their mortgage this year, based on data from the Financial Industry Research Monitor (FIRM). Last year, two thirds of mortgage borrowers said they planned to make extra payments towards their mortgage in 2020.

Additional Data from CMHC

• About 760,000 borrowers from Canada’s chartered banks have deferred their mortgage payments.
• 63% of all mortgages offered by the big banks were for uninsured loans.
• “Renewals with the same lender increased by 11% relative to the previous year and accounted for more than half of all extended loans,” CMHC noted.
• Up to 20% of borrowers said they “might be looking at switching lending institutions depending on whether their lender approved mortgage relief measures and how they dealt with accommodations during the crisis,” according to FIRM data.

BANK OF CANADA RELIES ON QUANTITATIVE EASING

As promised, the Bank held its target overnight rate at the effective lower bound of 25 basis points with the clear notion that negative policy rates are not in the cards. Instead, the central bank will rely on large-scale asset purchases–quantitative easing (QE–of at least $5 billion per week of Government of Canada bonds. QE adds liquidity to the financial system and keeps market yields low. The Bank began aggressive QE with the beginning of the pandemic and will not cease until the economy has recovered, and inflation is sustainably at 2%. This could be years away, as for example, Ontario has paused reopening plans with the virus numbers ticking up. Many public health officials are expecting infections to rise with the opening of schools and the turn to colder weather. The government is preparing for a possible second wave. Policymakers, however, have dialed back language on more aggressive action.

The Bank has stated, “Both the global and Canadian economies are evolving broadly in line with the scenario in the July Monetary Policy Report (MPR), with activity bouncing back as countries lift containment measures. The Bank continues to expect this strong reopening phase to be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support. The pace of the recovery remains highly dependent on the path of the COVID-19 pandemic and the evolution of social distancing measures required to contain its spread.”

In Canada, real GDP fell by 11.5% (39% annualized) in the second quarter, resulting in a decline of just over 13% in the first half of the year, mainly in line with the Bank’s July Monetary Policy Report (MPR) central scenario. All components of aggregate demand weakened, as expected. Global financial conditions have remained accommodative. Although prices for some commodities have firmed, oil prices remain weak.

As the economy reopens, the bounce-back in activity in the third quarter looks to be faster than anticipated in July. Economic activity has been supported by government programs to replace incomes and subsidize wages. Core funding markets are functioning well, and this has led to a decline in the use of the Bank’s short-term liquidity programs. Monetary policy is working to support household spending and business investment by making borrowing more affordable.

Housing activity has been particularly robust with substantial existing home sales in July and August. With record-low mortgage rates, buyers are satisfying their demand for more space and for moving further from city-center congestion. This urban exodus is more than anecdotal. You can get more for your money, and with many people working from home, long commutes don’t seem to be as relevant. The chart below shows that the outer suburbs of Toronto have seen the most significant increase in sales since the market picked up in early June.

Also, the construction of new homes surged to the highest level in more than a decade in August following a sharp increase in July. The greatest strength was in Toronto and Vancouver, particularly in multiple units.

Household spending rebounded sharply over the summer, with stronger-than-expected goods consumption and housing activity. There has also been a large but uneven rebound in employment. Exports are recovering in response to strengthening foreign demand, but are still well below pre-pandemic levels. Business confidence and investment remain subdued. While recent data during the reopening phase is encouraging, the Bank continues to expect the recuperation phase to be slow and choppy as the economy copes with ongoing uncertainty and structural challenges.

CPI inflation is close to zero, with downward pressure from energy prices and travel services, and is expected to remain well below target in the near term. Measures of core inflation are between 1.3% and 1.9%, reflecting the large degree of economic slack, with the core measure most influenced by services prices showing the weakest growth.

Bottom Line

The Bank also suggested that “as the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. To reinforce this commitment and keep interest rates low across the yield curve, the Bank is continuing its large-scale asset purchase program at the current pace. This QE program will continue until the recovery is well underway and will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective.”

The next policy meeting will be held on October 28 when the Bank will release its new forecast in the MPR. A rate hike is unlikely this year or in 2021.

–DR. SHERRY COOPER

Latest in Mortgage News: OSFI Changes Rules for Mortgage Deferrals

OSFI, Canada’s banking regulator, announced today it will start phasing out special regulatory capital treatment of deferrals given improving economic conditions.

The changes are effective immediately for mortgage payment deferrals granted by the Big 6 banks through to the end of September. Those deferrals will now only receive special capital treatment for up to three months as opposed to six. After September 30, any deferrals will be treated according to OSFI’s normal rules.

At the height of the pandemic and market volatility, the Office of the Superintendent of Financial Institutions announced special treatment for loan and insurance premium payment deferrals to be considered as “performing” as opposed to “non-performing.” A loan is considered non-performing when the borrower is late on making payments, typically by 90 days or more. Non-performing loans require the bank to set aside additional capital, or “provisions,” in the event of losses.

“The gradual phase out of this special capital treatment supports the ongoing stability of Canada’s financial system by ensuring a smooth transition back to pre-existing requirements,” OSFI said in a release.

“Our change today really reflects changes in economic conditions, unwinding of certain government programs and other indicators,” an OSFI official added during a conference call. “We’ll continue to monitor those going forward and, if conditions begin to deteriorate, we’re ready to act as necessary.”

Asked whether banks will be more likely to limit future deferrals to three months vs. six, OSFI officials noted that, “banks are well-capitalized to continue to offer deferrals and other supports to their borrowers even as the capital treatment winds down.”

As of July 30, there was approximately $170 billion worth of outstanding mortgage deferrals in place among the Big 6 banks, with the majority expected to mature between September and October, OSFI noted. The regulator added that the number of new deferrals in recent weeks has been “limited” and “stable at a low level.”

In recent weeks the big banks have reported a sharp decline in the number of mortgage payments still being deferred. For example, BMO and Scotiabank report that 90% of mortgage borrowers who had deferred payments are back to making regular payments. At RBC, normal payments have resumed for about 80% of its mortgage deferrals, with extensions granted to 19%. The remaining 1% are considered delinquent.

U.S. Federal Reserve Adopts New Approach to Inflation

The Federal Reserve announced a significant policy change on last week to “average inflation targeting.”

As a result, the central bank will allow inflation to run above its inflation target of 2% for some time before hiking interest rates.

Fed Chairman Jerome Powell called the change a “robust updating” of central bank policy. What it means is that the Fed will be less inclined to raise interest rates when unemployment falls, as long as inflation doesn’t rise too drastically.

“Many find it counter-intuitive that the Fed would want to push up inflation,” Powell said in prepared remarks. “However, inflation that is persistently too low can pose serious risks to the economy.”

Could the Bank of Canada Follow Fed Policy Changes?

It seems likely, considering the BoC launched a public consultation this week inviting the public to share its ideas on inflation targeting.

Canada’s central bank is gathering feedback through this online survey, which will be available until Oct. 1, 2020.

The review of how the BoC sets its inflation target has been spurred by the COVID-19 pandemic. Societal changes mean people are now spending less on items that have a larger impact on the inflation reading, such as gasoline. They’re now spending more on items that have a smaller impact on the index.

“While we have benefited from having well-anchored inflation expectations in the past, this mooring will be tested by the very rough economic waters caused by the pandemic,” Deputy Governor Lawrence Schembri said in a speech to the Canadian Association for Business Economics.

The Bank of Canada has been targeting inflation at 2% for nearly 30 years after it got out of control in the late 1970s and early eighties.

Home Building Springs Back to Highest Level Since 2017

Home building activity is back into high gear following a drastic slowdown during the height of the pandemic.

Housing starts were up 16% nationally in July compared to June, to a seasonally adjusted 245,604 units—the highest level since November 2017. In Toronto, building activity sprung back even more quickly, jumping 22% on an annualized basis.

“Despite the housing market’s durability thus far, we continue to see a soft spot ahead given the ongoing lack of immigration and upcoming resumption of many deferred mortgages,” wrote Royce Mendes of CIBC Economics.

Don’t Let Closing Costs Catch You Off Guard

First-time homebuyers are often on a tight budget, where every dollar is carefully accounted for. Yet, many report confusion when told how much money to bring to their lawyer’s office to complete their home purchase. It’s often thousands more than they expected. Why is that? And how can you better prepare yourself?

Today we will focus on the three biggest items that come up quite frequently as unexpected costs: property tax adjustments; mortgage interest adjustments; and PST on mortgage-default insurance. We don’t count items like land transfer taxes because they are (mostly) expected.

Property Tax Surprises

There are two ways property taxes can surprise you on your closing date.

1) The seller may have already paid property taxes for the full year, and as such is entitled to a credit for their unused portion. We call these prepaid property taxes.

Suppose your annual taxes are $7,200 and your seller prepaid the full year. With a closing date of August 13, you need to give back 140 days worth of taxes. That’s just over $2,760.

2) The other way property taxes can surprise you is when your mortgage lender is going to take a fixed amount for property taxes from your bank account along with every mortgage payment.

This means they are going to accumulate the taxes for you, and remit from time to time to your municipality.

They always start things off by collecting a few months’ worth upfront. It varies by lender and also by where we are in the calendar year. Don’t be surprised if it is three to six months’ worth of taxes. You can see how this adds up if your property taxes are $7,200 per year.

The Mortgage Interest Adjustment Surprise

Every mortgage has an interest adjustment date, which is the date from which your mortgage lender first starts calculating the normal ongoing interest you will pay.

When you close your purchase mid-month, you might have to prepay a few days’ interest on your closing date—it is called an interest adjustment, and it’s to address the stub period between the closing date and the beginning of the first payment cycle. Your lawyer should explain all that when you go to sign the papers.

The details will depend on your specific lender and how they approach this interest adjustment date. Some mortgage lenders will set your first payment exactly one payment period after your purchase completion date. In that case, the stars are aligned perfectly, and you can skip to the next section of this article. No Interest Adjustment for you.

Other lenders might prefer to collect from you on the first day of the month. And in this case, unless your purchase date is also on the 1st, there will be a partial month’s worth of interest your lawyer will collect from you, to adjust things until everything aligns perfectly.

Here is an example where you borrow $869,400 with, say, a 5-year variable interest rate of 1.86%:

• Your closing date is August 13, 2020
• Your first scheduled payment is set for October 1, 2020.
• Your Interest Adjustment Date is September 1.
• Your lawyer will collect an interest adjustment from you for the period August 13th to September 1.
• That would be an extra $840.56 you may not have been expecting.
• This adjustment comes into play, whether you choose monthly, weekly, biweekly or semi-monthly payments.

Neither way is wrong or right, they are just different, and result in a difference of how much money you need on your purchase closing date. As Rob McLister wrote here, “keep in mind, it is possible to avoid interest adjustments altogether. To do so, you need to schedule your first mortgage payment exactly one payment period (e.g., one month) after your closing date.”

The Provincial Sales Tax (PST) Surprise

If your down payment is less than 20% of the purchase price, you must purchase mortgage-default insurance (MDI) to protect your lender in case you fail to maintain your mortgage payments.

How much are we talking about for MDI insurance?

Well, if your down payment is less than 10% of the purchase price, this one-time MDI premium is 4% of the loan amount. But, you must pay Provincial Sales Tax (PST) on the insurance premium, and that must come from your own pocket and cannot be added to your mortgage.

As for the MDI premium itself, pretty much everyone just adds this to their core mortgage balance, and repays it over the life of their mortgage.

Suppose you want to buy a $900,000 townhome in Vaughan, ON, with a $65,000 down payment. Note that if you are going to put less than a 20% down payment on your home, then you must have mortgage insurance. This means your initial mortgage loan request would be $835,000 (cost of home – down payment).

Now you must factor in your insurance premium (4% of your initial mortgage loan amount). This would add a hefty $33,400.

But that’s OK, that $33,400 will simply be added into your total mortgage loan amount. It will be paid over time and included in your regular mortgage payment. So now your total mortgage loan amount is $869,400 (mortgage loan + insurance premium).

Remember our first point?

You must pay PST on the MDI premium, and that must come from your own pocket and cannot be added to your mortgage.

If you live in Ontario, you will pay 8% PST on your insurance premium to your real estate lawyer, which in this case is an extra $2,672* you may not have planned for, and this you must pay out of pocket.

*8% PST of $33,400 (insurance premium) = $2,672

PST Rates Across Canada: 

• 8% Ontario
• 7% British Columbia
• 0% – In Alberta, Yukon, Nunavut and the North West Territories, you do not have to pay PST.

You can also find your provincial sales tax rates here.

The Takeaway

You can see how these three items could add up to a sizeable sum. In our example, they total more than $6,000, but the actual costs will be different for each buyer. For these specific items, it will come down to:

• Is your down payment less than 20%, and thus you have an insured mortgage?
• Do you live in a province where you are subject to PST?
• Will your lender collect property taxes from you, or will you pay them directly?
• Did your seller prepay the property taxes on the property you are buying?
• How does your seller establish the Interest Adjustment Date?

Beyond these three potential surprises, there are other items that could become surprise closing costs: Top Ten Things You Need to Budget For When Buying a Home.

You need to understand which of them might pertain to your circumstances, and don’t wait till the last minute to find out. Your real estate lawyer, mortgage broker and real estate agent are all excellent sources of information about your home purchase. Don’t be afraid to ask!

–Ross Taylor

Home Prices Set New Record High, Sales Surpass Pre-COVID Levels

Continuing the upward trend that started in June, home sales bounced back to pre-COVID levels in July, soaring 30.5% year-over-year.

Home prices, too, set a new record high of $571,500, a 14.3% increase from July 2019, the Canadian Real Estate Association reported on Monday. Excluding the higher-priced markets of Toronto and Vancouver, the national average would be $454,500.

“What a difference three months makes, from some of the lowest housing numbers ever back in April to the multiple monthly records logged in July,” said Shaun Cathcart, CREA’s senior economist. “A big part of what we’re seeing right now is the snapback in activity that would have otherwise happened earlier this year. Recall that before the lockdowns, we were heading into the tightest spring market in almost 20 years.”

Another metric that shows sellers once again with the upper hand in most markets is the sales-to-new listing ratio, which is at 74%, the highest it’s been in 18 years, noted RBC economist Robert Hogue. A balanced ratio is between 40 and 60% and anything below 40% is considered a buyers’ market.

“COVID-19 did not destroy this year’s spring market—it mostly delayed it,” Hogue said, noting the busy spring market activity is now taking place during the summer, a traditionally slower period for home sales.

“We expect further unwinding of pent-up demand to keep sales brisk in August and perhaps September before cooling later this year,” he added.

Historically low housing supply is also contributing to this unusual situation of a hot real estate market occurring while unemployment is still above 10%.

There were just 2.8 months of inventory available, meaning that’s how long it would take to liquidate current inventories at the current sales rate. That’s the lowest reading CREA has on record.

A Look at Individual Markets

CREA noted that, “generally speaking, most markets east of Saskatchewan are seeing prices accelerate in line with strong sales numbers,” while B.C. and Alberta experienced more “modestly positive” price gains.

Here’s a look at where average prices stand in some of the country’s key markets:

• Ottawa: $506,700 (+18.4%)
• Halifax: $363,692 (+17.2%)
• Kingston, ON: $458,026 (+15.2%)
• Fredericton: $571,471 (+14.3%)
• Greater Montreal Area: $401,300 (+14.1%)
• Greater Toronto Area: $880,400 (+10%)
• Greater Vancouver Area: $1,031,400 (+4.5% year-over year)
• Victoria: $724,600 (+3.5%)
• Calgary: $411,200 (-1.4%)

Making Sense of This Housing Market

Earlier this year, before COVID changed the world, several of Canada’s largest housing markets were approaching “frothy” levels of activity not seen since 2016. In January, for example, the Greater Toronto Area recorded an 8.5%  increase in selling prices compared to the year before.

Much of that demand came from first-time buyers competing fiercely against one another for fear of missing out, or “FOMO.”

In July, GTA home prices soared 10% year-over-year to an average price of $800,400 for all property types.

Yet, homebuying intentions are stronger than ever. The percentage of renters who said they plan to purchase in the next 12 months more than doubled from 7% to 14%, according to recent data from Mortgage Professionals Canada. Likewise, 9% of current homeowners plan to purchase a new home within the next year, up from 7% in 2019.

“It can be hard to understand how the housing market can be so hot when the unemployment rate remains in double-digits,” wrote Brian DePratto of TD Economics.

One possible explanation, he says, is to look at the demographics most impacted by COVID-related job losses.

“The pandemic has disproportionately impacted lower-income Canadians, who are less likely to be or become homeowners,” DePratto said, adding that July employment among low-wage earners was 85.4% of pre-pandemic levels, compared with 97.4% for all other paid employees.

Secondly, government assistance programs to support those affected by COVID are likely keeping economic data stronger than it normally would be.

“A number of support programs, including mortgage forbearance, are helping insulate the economy from the worst impacts of the pandemic,” DePratto said. “As autumn approaches, these programs will expire or change form. Depending on the progress of the broader economic recovery, this could bring significant headwinds to housing markets, particularly prices.”

RECORD-SETTING CANADIAN HOUSING MARKET IN JULY

Canadian Housing Market Very Strong in July

Today’s release of July housing data by the Canadian Real Estate Association (CREA) showed a blockbuster July with both sales and new listings hitting their highest levels in 40 years of data. This continues the rebound in housing that began three months ago.

National home sales rose 26% month-over-month (m-o-m) in July, which translates to a 30.5% gain from a year ago (see chart below). July’s sales activity was the strongest for any month in history. According to Shaun Cathcart, CREA’s Senior Economist,  “A big part of what we’re seeing right now is the snapback in activity that would have otherwise happened earlier this year. Recall that before the lockdowns, we were heading into the tightest spring market in almost 20 years. Things may have gone quiet for a few months, but ultimately the market we’re seeing right now is mostly the same one we were heading into back in March. That said, there are some new factors at play as well. There are listings that will come to the market because of COVID-19, but many properties are also not being listed right now due to the virus, as evidenced by inventories that are currently at a 16-year low. Some purchases will no doubt be delayed, but the new-found importance of home, lack of a daily commute for many, a desire for more outdoor and personal space, room for a home office, etc. will certainly also spur activity that otherwise would not have happened in a non-COVID-19 world.”

For the third month in a row, transactions were up on a month-over-month basis across the country. Among Canada’s largest markets, sales rose by 49.5% in the Greater Toronto Area (GTA), 43.9% in Greater Vancouver, 39.1% in Montreal, 36.6% in the Fraser Valley, 31.8% in Hamilton-Burlington, 28.7% in Ottawa, 16.9% in London and St. Thomas, 15.7% in Calgary, 12.1% in Winnipeg, 9.7% in Edmonton and 5.4% in Quebec City.

COVID SUPERCHARGES CANADIAN HOUSING– YET CMHC STILL GLOOMY

Pandemic Triggers Red-Hot Summer Housing Market

We will get the full story on July housing in Canada when the Canadian Real Estate Association releases its July data in the next few days, but local real estate boards have reported a robust July market. Even in Calgary, year-over-year sales have jumped by double digits. Sales in Montreal were up more than 45% y-o-y, while Ottawa and the GTA were also very strong. Out west, Vancouver and other hot spots in BC saw the results of pent up activity, from both homebuyers and sellers, that had been accumulating over the past year.

Remember, had it not been for the pandemic, a record spring sales season was in the cards. The lockdown postponed that strength, with sales jumping sharply in May, June and July. Supply continues to remain limited relative to demand, and the Bank of Canada is looking towards housing as a leading sector in the recovery.

Record-low interest rates have boosted affordability everywhere. The Bank of Canada has made it clear that interest rates will remain low for an extended period. Mortgage rates have fallen, as have interest rates on home equity lines of credit. Even five of the Big Six banks have cut their advertised 5-year fixed mortgage rates (posted rates) by about 15 basis points to 4.79%.

These rates have been very sticky on the downside, as banks are reluctant to cut posted rates, which are is used to calculate the penalty for breaking a mortgage. Indeed, the gap between the posted rate and the 5-year government of Canada bond yield is historically wide. So is the gap between posted rates and actual contract mortgage rates at the very same banks.

The Bank of Canada posted rate is the qualifying rate for the mortgage stress test for insured and uninsured mortgages at the federally-regulated lenders–the so-called B-20 rule. That qualifying rate is set to fall from its current level of 4.94% to 4.79% later today when the central bank is due to update its figure. 

Last February, following months of pressure from the real estate industry, the Department of Finance and the federal banking regulator announced they would rejig the “floor” of stress tests that borrowers must pass to qualify for insured and uninsured home loans. Then came COVID-19, and a sweeping government rescue that included regulatory relief for lenders. As part of the response, the change to the stress test, which was planned for April, was suspended indefinitely.

Last month, the Office of the Superintendent of Financial Institutions announced it would “gradually restart” policy work in the fall. Still, it made no mention of resuming consultations on the change to its stress test for uninsured mortgages, a vital component of the regulator’s B-20 guideline. If the new rules had been implemented, it is estimated that the qualifying rate floor would be roughly 4.09% rather than the new rate of 4.79%.

Several factors, in addition to low interest rates, have contributed to the housing market surge. Having spent so many months working from home, many people are looking for more space. With a significant number of businesses announcing that telecommuting will be the new normal, at least most of the time, buyers are moving to more remote suburban locations where their dollars buy more space. This has been reflected in the slowdown in the condo market. This is not just a Canadian phenomenon but is evident in the US and parts of Europe as well.

Despite the surprising strength in homebuying during COVID, CMHC continues to blast warnings.

CMHC Wants To Expose The “Dark Economic Underbelly”

Yesterday, Evan Siddall, the CEO at the Canada Mortgage and Housing Corp, published an August 10 letter to the financial industry imploring lenders to “reconsider” offering mortgages to highly leveraged households, saying excessive borrowing will worsen the pain of the coming economic adjustment. Evan Siddall said the Crown corporation had lost market share due to restrictions it imposed on high-risk borrowers earlier this summer. Private mortgage insurers have picked up that business, weakening CMHC’s position and threatening the agency’s ability to protect the mortgage market in the event of a crisis, he said.

CMHC continues to project that house prices will fall later this year, and next, “once government income supports unwind, bankruptcies increase and unemployment starts to bite.” A highlighted sentence in the letter says, “We don’t think our national mortgage insurance regime should be used to help people buy homes with negative equity. But by offering 95 percent loan-to-value mortgages subject to a 4 percent capitalized insurance fee in the midst of an economic calamity, that’s what insurance providers are doing.” Siddall, who steps down from his position at the end of the year, goes on to say that we risk exposing too many people to foreclosure. 

CMHC announced in June it would narrow eligibility criteria to require higher credit scores and lower debt burdens to qualify for a mortgage. The move, which took effect on July 1, was intended to protect new home buyers from falling prices and reduce taxpayer risk to any market correction.

We have sustained a reduction in our market share to promote a more competitive marketplace for your benefit,” Siddall said in the letter. “However, we are approaching a level of minimum market share that we require to be able to protect the mortgage market in times of crisis. We require your support to prevent further erosion of our market presence.”

CMHC’s private-sector competitors, Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co., opted not to follow along with the rule changes and have increased their market share, as a result, said Siddall.

Siddall concluded with two requests for lenders: “We would hope you would reconsider highly leveraged household lending. Please put our country’s long-term outlook ahead of short-term profitability. Second, please don’t aggravate the impact by undermining CMHC’s market presence unnecessarily.”

CMHC’s ability to respond effectively in a crisis will be weakened if its market share deteriorates significantly further, he said. “If you want us in wartime, please support us in peacetime.”

–DR. SHERRY COOPER