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Canadian two-storey house prices rose 9.07% this year. Too much, says the CMHC

Last Updated: November 30, 2015


Canada house pricesHouse prices in Canada just cannot go on rising forever.  Or can they?

House prices in Canada’s eleven major cities rose by 5.64% during the year to end-Q3 2015 (4.56% inflation-adjusted), based on figures from Teranet – National Bank of Canada. And these price rises have been accelerating, with annual price growth of 4.73% (3.49% inflation-adjusted) during the first quarter, followed by 5.06% (3.98% inflation-adjusted) in the second quarter. The central bank has taken action repeatedly, but the house prices still spiral up, as if nothing can stop them.

Serious people who understand these things have been issuing dire warnings.  The Canada Mortgage and Housing Corporation (CMHC) recently made clear that it felt that Canadian major cities´ housing markets are mostly overvalued

“In 11 of the 15 centers covered by the Housing Market Assessment (HMA) [there] is overvaluation," said Bob Dugan, CMHC´s Chief Economist.

The CMHC highlighted its concern about Toronto, where "the continued rise in house prices has not been matched by growth in economic and demographic fundamentals", and also Montreal and Quebec, though the report concluded that there was little evidence of problematic conditions in Vancouver or Victoria.

According to the Canadian Real Estate Association (CREA):

  • The average price of a two-storey single family home increased by 9.07% y-o-y to September 2015.
  • The national average price of a one-storey single family home rose by 6.48% during the year to September 2015.
  • Townhouses / row houses prices increased by 4.40% on average.
  • Apartment prices increased by 4.22% on average.

CREA noted that the national average price rise was mainly caused by increased sales in Greater Vancouver and Greater Toronto, Canada´s most active and expensive housing markets. When these two are excluded, the annual average price gain slowed to 2.9%.
There have been big regional variations:

  • Tight housing supply in Greater Toronto Area (GTA) and Greater Vancouver, plus low interest rates, pushed their house prices upward
  • The oil price slump hit oil-producing areas such as Calgary, dragging house prices down

Of Canada´s eleven major cities, seven experienced house price rises during the year to end-September 2015.  Hamilton´s housing rose most (10.56%), followed by Vancouver (10.43%), Toronto (8.65%), and Victoria (5.93%).

House prices rose less in Edmonton (0.80%), Calgary (0.30%), and Ottawa (0.22%).

House prices fell in Quebec (-2.86%), Winnipeg (-2.26%), Halifax (-0.21%), and Montreal (-0.01%).

Home sales are being suppressed by lack of supply

canada housing starts and completions

In September 2015, home sales fell by 2.1% from the previous month, but were 0.7% up from year-ago levels, according to the Canadian Real Estate Association (CREA). More than half local markets experienced a decline in sales during the period, especially Greater Vancouver, Calgary, and the Greater Toronto Area (GTA).

But the reason sales declined isn´t that people don´t want to buy. 

“A lack of supply in some parts of the country is likely keeping a lid on transactions,” said CREA’s Chief Economist Gregory Klump.

“The GTA and Greater Vancouver made sizeable contributions to the monthly decline in national sales activity. They also rank among the tightest urban housing markets in the country due to a shortage of inventory and supply of land on which to build, which is why prices there continue to grow strongly,” Klump added.

In fact, total year home sales for 2015 are expected to 3.3% higher than the previous year, because of stronger than anticipated sales in Ontario and British Columbia, two provinces accounting for 60% of Canada´s total housing activity, according to CREA’s latest forecast report of September 2015.

Housing starts rose 0.7% in 2014 to 189,329 units, according to Canada Mortgage and Housing Corporation (CMHC) - still 14.5% below the pre-crisis 2002 to 2008 average of housing starts. Housing completions, on the other hand, fell by 2.2% to 181,428 in 2014, 12.5% lower than the 2002 to 2008 completions average.

Mortgage interest rates are at historic lows

The main reason for the house price rises is that Canadian mortgage rates are enticingly low:

  • Interest rates on 1-year mortgages averaged 2.89% in October 2015, down from 6.35% in October 2008.
  • Interest rates on 3-year mortgages averaged 3.39% in October 2015, down from 7.05% in October 2008.
  • Interest rates on 5-year mortgages averaged 4.64% in October 2015, down from 7.2% in October 2008. 

Canada interest rates

On January 22, 2015 the central bank unexpectedly cut its key rate by 0.25 percentage points, to 0.75%, due to lower anticipated inflation triggered by the oil price collapse. Previously the key rate had been at 1% since September 2010.  Another rate cut, to 0.50%, followed in July 2015 after Canada entered recession for the first time in six years.

The history of a long and steady boom

Canada escaped the excessive housing booms which took place in the US and in Europe, and avoided a major collapse in prices.  But house prices have risen almost continuously for 15 years:

  • From Q1 2000 to Q1 2009, house prices rose by 79% (49% inflation-adjusted), due to low interest rates and economic growth.
  • From Q2 2009 to Q3 2012, house prices increased by another 24% (17% inflation-adjusted), despite government efforts to cool the housing market.
  • From Q4 2012 to Q4 2014, tighter mortgage rules implemented in July 2012 helped calm the market, but house prices still rose by around 8.9% (6.1% inflation-adjusted).

House prices are likely to rise 6.2% in 2015, according to CREA. In British Columbia the average house price is projected to rise 8.5%, the only province with a projected house price increase higher than the national average. Ontario is expected to have an average price gain of 6%.

British Columbia and Ontario´s strong house price rises are likely to be offset by price falls in areas heavily affected by the oil price shock - like Alberta, Saskatchewan and parts of Atlantic Canada. "In Alberta, home sales have gone from setting records in 2014 to running at or below their 10-year average, as uncertainty surrounding the outlook for oil prices and employment continues to sideline potential homebuyers," according to CREA.

In 2016, CREA expects 2% house price growth nationally, while sales are likely to fall both in 2016 and 2017, according to the Canada Mortgage and Housing Corporation (CMHC).

Market cooling measures

Since June 2015, new tougher CMHC mortgage rules have made life harder for buyers with self-employment income, or with little cash for down payments:

  • The CMHC increased the "qualifying" rate for mortgages under five years.  “Qualify” means that the borrower must prove he could afford to repay at a higher rate.  For instance, if you apply for a 2.25% five-year variable mortgage, lenders generally make you "qualify" at their posted 5-year rate (currently 4.64%).
  • "Third-party verification" of income is now required by lenders of all borrowers, including the borrower´s income history and employment status.
  • Cash-back down payment mortgages are no longer permissible if the buyer is unable to provide a 5% down payment on his own.

It isn´t surprising that Canada´s booming housing market long been a concern for the authorities.  And they´ve been trying to clamp down for quite a while. 

  • In July 2012, tighter mortgage rules took effect:

The maximum length of mortgage borrowers could obtain was reduced, from 30 years to 25 years

Canada outstanding mortgage

The maximum LTV ratio was lowered from 85% to 80%

The maximum gross debt service (GDS) was limited to 39% of income, and total debt service (TDS) to 44%

Mortgage insurance on properties over $1 million was banned

  • In mid-2013, the Canada Mortgage and Housing Corporation (CMHC) limited its guarantees to banks and other lending companies.
  • In early 2014, the CMHC discontinued mortgage insurance for condominium construction, and ceased providing mortgage insurance to second home buyers or to self-employed borrowers without third-party income validation.

So far, none of these measures has prevented property prices rising, no doubt because of the very low interest-rate environment.

Rental yields are quite high, especially in Montreal

Average rents in Canada rose by 2.2% during the year to April 2015, according to the Canada Mortgage and Housing Corporation (CMHC). All provinces saw higher average rents for new and existing two-bedroom apartments. Manitoba had the highest rent increase, up by 6.6% during the period, followed by Alberta with a 5% rent hike.

Gross rental yields in Montreal are moderately high, ranging from 6.10% to 6.82% as of January 2015, according to Global Property Guide research. Montreal’s average rental yield rose to around 6.41% in 2015, up from the previous year’s average of 5.57%, but down from the 7.19% average rental yield which obtained in 2012.

In Toronto, rental yields range from 4.18% to 5.58%. Toronto’s average rental yield in 2015 increased slightly to 5.08%, from last year’s average yield of 4.92%.

Vacancy rates are low

The national vacancy rate was 2.9% in April 2015, slightly higher than 2.7% during the same period last year, according to the CMHC. "However, vacancy rates decreased in most of the major centres of Ontario and British Columbia, reflecting stronger economic conditions," said Bob Dugan, CMHC Market Analysis Centre’s Chief Economist.

"In Ontario, improving employment conditions for young adults aged 15 to 24, a key source of rental demand, and a stable supply of rental units placed downward pressure on vacancy rates, while increased immigration to British Columbia, another key source of rental demand, more-than-offset an increase in the province’s rental market supply,” Dugan added.

New Brunswick has the highest vacancy rate (8%), followed by Prince Edward Island (6.5%), Saskatchewan (5.6%), and Nova Scotia (4.6%). British Colombia has the lowest vacancy rate (1.8%).

Highest and lowest rents

Alberta has the most expensive rental properties in Canada, with an average monthly rent of CA$ 1,249 (US$ 949) for a two-bedroom apartment.

Canada rental vacancy rate

British Colombia has an average monthly rent of CA$ 1,136 (US$ 863).

Ontario has an average monthly rent of CA$ 1,099 (US$ 835), Saskatchewan CA$ 1,075 (US$ 816) per month, and Manitoba with CA$ 1,002 (US$ 761) per month.

The lowest average rents for two-bedroom apartments can be found in New Brunswick with CA$ 746 (US$ 567) per month, and in Quebec with CA$ 714 (US$ 542) per month.

Economic rebound expected in 2016

Canada entered recession in the first half of 2015, with GDP contracting 0.8% in Q1, followed by a 0.5% drop in Q2, according to Statistics Canada (Statscan). But two consecutive quarters contraction, many economists don´t seem too bothered.

“The Canadian economy does not yet appear to be in recession, despite satisfying the commonly employed definition of having experienced two consecutive quarters of declining GDP,” according to Moody Analytics´ Associate Economist Alexander Lowy.

As Bank of Montreal´s Chief Economist Doug Porter describe the situation, it is indeed the "Best. Recession. Ever".  Several reasons explain why.

First, the economic contractions for the past two quarters were tiny. Real GDP fell 0.1% during the second quarter (quarterly basis), following a 0.2% contraction in the first quarter. In June 2015 GDP actually rose by 0.5% m-o-m at a time when there is an oil price slump, and despite Canada´s energy sector accounting for almost 28% of the country´s GDP in 2014.

Second, “Canada’s economy just keeps on adding jobs, mostly of the full-time variety,” according to Porter. Around 180,000 jobs were added to the Canadian economy since June 2014, when oil and commodity prices started to crash, according to economists at Scotiabank. As of October 2015, employment rose by 44,000, which brings the number of employed in Canada to more than 18 million. Unemployment fell by 0.1 percentage points to 7% during the same period.

Third, robust consumer spending exemplified by big ticket purchases such as houses and cars. “On the recession debate, we will simply note that Porsche sales are up a tidy 30 per cent so far this year in Canada,” according to Porter.

Canadian economy is expected to rise by around 1.1% in 2015, down from a 2.4% growth in 2014. It is expected to rebound with a 2% growth in 2016, followed by a 2.5% GDP rise in 2017, based on the Bank of Canada´s (BoC) October 2015 Monetary Policy Report. The country´s annual inflation rose by 1% during the year to September 2015, slightly lower than the 1.3% annual inflation in August.

Another Trudeau!  Better looking than the last one!

Canada gdp growth and inflation rate

On November 4, 2015, Canada welcomed its newly-elected Prime Minister Justin Trudeau.  In the October 2015 federal election, Trudeau´s Liberal Party won 184 seats, followed by former PM Harper´s Conservative Party (99 seats), and by Thomas Mulcair´s Democratic Party (44 seats).

Prime Minister Trudeau stated that his priority legislation after the parliament is reconvened in December will be lower taxes for middle-income nationals, and higher taxes for top 1% of income earners.

On November 5, 2015, PM Trudeau made headlines by appointing equal numbers of men and women cabinet members.


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Title: Property Prices in Canada | Canadian Real Estate Prices

Description: A glance at changes in property, house and real estate prices in Canada

Keywords: global property guide, property guide, global property, Canada, rental yields, overseas property, property markets, property investments