Canadian Housing Market Strong, Stable

The Canadian Real Estate Association reports the country is experiencing national average increases in home prices while most provinces also enjoy more sales than in the previous quarter. …

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The Canadian Real Estate Association reports the country is experiencing national average increases in home prices while most provinces also enjoy more sales than in the previous quarter. Although market observers are not worried, they do expect the Canadian real estate to stabilize moving through 2012. The government plans on tightening lending restrictions in an effort to avoid a bubble which, combined with a stable economic forecast, should help continue to push up new-home prices and energize an already robust rental market. For more on this continue reading the following article from Global Property Guide.

Canada’s housing market remains strong, despite moderate economic growth in the first quarter of 2012.  But the housing market is expected to slow during the rest of 2012.

The national house price index rose by 6.39% (5.08% in real terms) during the year to end-May 2012, according to Teranet-National Bank of Canada.   Canadian Real Estate Association (CREA) figures also showed quite strong house price increases, with the MLS Home Price Index (HPI) rising 5.2% during the year to May 2012, to a benchmark price of CA$451,900 (US$438,610).

Northwest Territories (25.8%) and Prince Edward Island (22.4%) had the biggest house price increases. They are followed by Nova Scotia and Manitoba, with average house price rises of 6.6% and 6.4%, respectively.  British Columbia was the only province to experience a sharp house price, with a 12.9% fall.

Home sales in Canada had their first monthly decline of the year in May. However sales were still 9% higher than a year ago, according to CREA.  There was 5.9 months inventory on the market, up from 5.7 months in April.

To discourage house price rises, Finance Minister Jim Flaherty announced new mortgage rules, effective July 9, 2012, reducing the maximum amortization for government-insured mortgages from 30 years to 25 years, and lowering the maximum LTV ratio to 80%.

Inflation eased to 1.2% this May, allowing the Bank of Canada to keep its overnight rate at 1%.  The BoC may hold the key rate constant for the remainder of year, since Canada’s economy has underperformed, with growth below Governor Mark Carney’s forecast of 2.5% y-o-y to Q1 2012. Instead, there was only 1.9% growth.

The average house price is expected to rise at the same rate as inflation through 2013, according to the Canada Mortgage and Housing Corporation (CMHC), and is forecast to reach CA$372,700 (US$366,254) by end-2012, and CA$383,600 (US$376,965) in 2013.

Housing starts are expected to increase by 4.5%, to 202,700 units by end-2012.

High-priced houses in Canada

British Columbia has the most expensive housing in Canada, with an average price of CA$546,114 (US$528,514) in Q1 2012 for existing houses.  Ontario and Alberta followed, with average resale prices of CA$384,990 (US$372,583), and CA$354,456 (US$343,033), respectively.

New Brunswick had the cheapest houses, with an average price of CA$157,119 (US$152,056).

MLS® AVERAGE RESIDENTIAL RESALE PRICE

 
AVERAGE RESALE PRICE ($)
ANNUAL CHANGE (%)
2010
2011
Q1 2012
2010
2011
Q1 2012
Canada
339,212
364,289
368,485
5.8
7.4
1.6
Ontario
342,590
366,390
384,990
7.5
6.9
8.6
British Columbia
505,178
561,304
546,114
8.5
11.1
-4.1
Alberta
352,301
353,394
354,456
3.1
0.3
-0.2
Quebec
241,456
259,057
256,697
7.1
7.3
2.3
Nova Scotia
206,186
212,512
223,214
4.8
3.1
5.9
Prince Edward Is.
147,196
149,617
188,936
0.8
1.6
28.1
New Brunswick
157,240
160,545
157,119
1.5
2.1
-1.8
Manitoba
222,132
234,604
239,911
10.3
5.6
4.0
Saskatchewan
242,258
258,386
271,741
4.0
6.7
8.0
Newfoundland and Labrador
235,341
251,581
266,459
14.0
6.9
6.3
Source: Canadian Real Estate Association

 

Tighter mortgage lending rules

The dear that Canadian housing might be in bubble has been a major concern for the government.  In order to ensure a soft landing, tighter mortgage rules take effect on July 9, 2012:

  • The reduction of maximum amortization from 30 years to 25 years, discouraging buyers from acquiring too much debt; and
  • Maximum LTV ratio was lowered from 85% to 80%.

As the Canadian Mortgage Trends (CMT) reports, the government will also:

  • Limit the maximum gross debt service (GDS) to 39%, and the total debt service (TDS) to 44%; and
  • Ban mortgage insurance on properties over $1 million.

These measures were applauded by Bank of Canada (BoC) Governor Mark Carney as appropriate and timely, a contribution to reducing household indebtedness.   The new mortgage rules are expected to tighten mortgage lending, which the country’s low interest rates won’t.

The Bank of Canada has maintained its key interest rate at 1% for 14 policy announcements, since implementation in September 2010.

Actual mortgage rates also remain at historic lows, compared to pre-crisis levels of 2008:

  • The 1-year mortgage rate has fallen to 3.2% in May 2012, from 6.15% in May 2008.
  • Interest rates on 3-year mortgages have decreased to 3.95% in May 2012, from 6.15% in the previous four years.
  • The 5-year mortgage rate has fallen to 5.34% in May 2012, from 6.65% four years earlier.

Higher existing home sales in 2012

Sales of existing homes in Canada are expected to increase by 3.4% in 2012, to 472,300 units, according to the Canadian Mortgage and Housing Corporation (CMHC).

In 2011, rhere was a 2.4%  increase in total MLS existing home sales. Leading the increase were Saskatchewan (10.3%) and Alberta (8.1%). Sales of existing homes in Canada peaked in 2007, when 520,511 housing units were sold.

Housing starts slightly increased in 2011, by 2.1% to 193,950 units, having peaked in 2007 at 228,343 housing units.  Meanwhile, completions fell by 6.01% in 2011, to 175,623 units. The average number of housing units completed from 2002 to 2008 was 207,244 units per year.

New house prices up a little

Canada’s new housing price index (NHPI) rose by 2.5% during the year to April 2012, according to Statistics Canada. The metropolitan areas with the highest y-o-y price increases were Toronto and Oshawa (5.9%), Regina (5.6%) and Winnipeg (4.3%).  

Stable rental market; lower vacancy rate

Average rents in Canada increased 2.1% during the year to April 2012, according to CMHC. Rents for new and existing two-bedroom apartments rose in all provinces, with rises from 0.9% (Quebec) to as high as 6.6% (Manitoba).

The most expensive rental properties can be found in Alberta, which has average monthly rents of CA$1,055 (US$1,028) for a two-bedroom apartment, followed by British Columbia with CA$1,036 (US$1,010) per month, and Ontario with CA$1,014 (US$988) per month.

Quebec offers the lowest rents for two-bedroom apartments at CA$677 (US$660).

Rental yields in Montreal are really attractive, ranging from 6.30% to 8.19% on small apartments, according to Global Property Guide research of January 2012. The average rental yield in Montreal increased to 7.19%, from its 6.06% average in 2011.

Toronto’s rental yields are lower, ranging from 3.68% to 5.59%. Its average rental yield fell to 4.70%, from an average of 5.71% in 2011.

Due to the country’s improving job market, and the influx of new migrants to major centres, demand for rental apartments has been increasing, causing a decline in the national vacancy rate to 2.3% in April 2012, down from 2.5% from a year earlier, according to CMHC.

Among the provinces, New Brunswick had the highest vacancy rate at 6.2%, followed by Prince Edward Island (4.8%), and Nova Scotia and British Columbia (3.4%). Manitoba had the lowest vacancy rate at 1.2%.

Modest economic growth in 2012

Canada’s economic expansion has slowed with an annualized rate 1.9% in Q1 2012, after 2.5% economic growth in 2011, partly due to the spillover effect of the turbulent economic conditions in Europe.

"The outlook for global economic growth has weakened in recent weeks,” says the Bank of Canada.  “Some of the risks around the European crisis are materializing and risks remain skewed to the downside.”

As in 2011, it was business investment contributed most in keep things afloat during Q1 2012.

Housing investment expanded by 2.9% during the quarter. Business investment in plant and equipment was up by 1.2%, its ninth consecutive quarterly increase, according to the Statistics Canada.

Meanwhile, consumer spending growth slowed to 0.2% in Q1 2012, down from the previous quarter’s 0.7% gain.

“Fortunately, Canada has fared relatively well in 2011 but we expect modest growth ahead, constrained by a very challenging external environment, especially the situation in Europe,” said Canadian Chamber of Commerce’s President and CEO Perrin Beatty.

Other external factors include the United States’ modest economic growth, Canada’s strong currency, and cooling demand in emerging-market economies.
The IMF forecasts Canada’s growth to slow to 2.1% in 201, after growth of 3.2% in 2010, and 2.5% in 2011.

Unemployment remains high at 7.3% in May 2012.

This article was republished with permission from Global Property Guide.

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