Expanding Regional Economies to Lift Home Prices in Canada’s Major Markets

Shorter than anticipated housing market correction puts Toronto back on track 

Highlights:

• Toronto to have a shorter housing correction than seen in Vancouver

• Tighter access to mortgage financing and eroding affordability in Vancouver and Toronto have more buyers shifting their focus to condominiums, putting upward pressure on price appreciation

• Rising interest rates and a strong Canadian dollar support more moderate home price appreciation

TORONTO, October 12, 2017 – According to the Royal LePage House Price Survey [1], home prices in Canada’s five most populated housing markets are rising at a similar, healthy pace on a quarter-over-quarter basis, the first time this has occurred in six years.

The year-over-year price change data in the Royal LePage House Price Composite is the most useful metric for determining the health of Canada’s real estate market. However, examining quarter-over-quarter movements can reveal useful short-term housing market trends. In the third quarter, home prices in the Greater Toronto Area, Greater Vancouver, Greater Montreal Area, Calgary and Ottawa all rose at rates between 1.5 and 3.5 per cent on a quarter-over-quarter basis, indicative of a much more balanced Canadian residential real estate market.

The Royal LePage National House Price Composite, compiled from proprietary property data in 53 of the nation’s largest real estate markets, showed that the price of a home in Canada increased 13.3 per cent year-over-year to $628,411 in the third quarter. When broken out by housing type, the median price of a standard two-storey home rose 13.9 per cent year-over-year to $748,049, and the median price of a bungalow grew 9.5 per cent to $525,781. During the same period, the median price of a condominium rose 15.2 per cent to $413,670.

“Uneven regional economic growth has plagued Canada for much of the past decade, a challenge most evident in the nation’s housing markets,” said Phil Soper, President and CEO, Royal LePage. “For the first time since 2011, we are seeing real estate in all five of our largest cities appreciate at a manageable, healthy clip. Canadian housing is enjoying a Goldilocks moment – not too hot, and not too cold.”

“For now, the Toronto and Vancouver housing markets have returned to earth,” continued Soper. “After a period of unsustainable price inflation and sharp market corrections, we are seeing low single digit appreciation in each. Calgary has shaken off the oil-bust blues and Montreal appears to be at the beginning of a new era of economic prosperity. Rounding out the ‘big five,’ the Ottawa market is behaving like it usually does – a picture of healthy market growth.”

“Marginally higher borrowing costs should dampen domestic demand somewhat, and with less currency-adjusted purchasing power, foreign buyer activity is off peak levels and will likely stay that way in the near-term,” added Soper.

During the third quarter, the Greater Toronto Area saw the largest year-over-year home price increase of any major Canadian market, surging 21.7 per cent on the back of strong gains witnessed at the beginning of 2017. Meanwhile, home prices in Montreal continued to climb at a rate beyond what has been the historical norm, appreciating by 14.3 per cent when compared to the same time last year, while Ottawa grew by 7.9 per cent over the same period. When looking at the largest markets in Canada’s westernmost provinces, Calgary and Greater Vancouver inched further out of their recovery, with home prices rising 5.0 and 2.5 per cent year-over-year, respectively.

Following a very similar trend to the Vancouver housing correction of 2016, the Greater Toronto Area market experienced a sharp drop in sales volumes beginning in April 2017, which continued through much of the third quarter. With underlying employment and economic growth on solid footing, the Toronto market began to grow again in August.

Potential buyers who were previously on the sidelines taking a wait-and-see approach have now jumped back into the market after realizing prices did not drop as certain market watchers had anticipated. On the supply side, some sellers who had attempted to capitalize on an uncharacteristically strong spring have taken their homes off the market. Together, these trends have caused the region to revert to a more balanced market where supply and demand have stabilized in the majority of areas.

Nationally, condominium prices increased 15.2 per cent on a year-over-year basis and have begun to appreciate faster than any other housing segment in large urban centres such as Toronto and Vancouver. This is likely to continue for the foreseeable future and begin a trend in other cities. The overall affordability of condominiums continues to attract first-time homebuyers and purchasers looking for attractively-priced real estate as new mortgage regulations, interest rate increases and higher home prices have effectively limited purchasing power.

Under the Ontario Fair Housing Plan, all private rental units in the province are now subject to rent control, and housing market watchers have a number of concerns regarding the impact of this legislation. Removing the ability to adjust prices by more than 2.5 per cent a year when long-term residential real estate price appreciation is approximately 5.0 per cent per year makes rental units less attractive to investors. It is likely fewer purpose-built rental projects will be launched in the near future. According to one industry report, more than 1,000 such projects have already been cancelled and vacancies have already fallen to 1.3 per cent across the GTA[2].

“Ontarians deciding between renting and buying a home are facing two tough options,” said Soper. “Purchasers trying to break into the entry-level market now face a highly competitive environment, while those waiting to buy are met with high rental prices brought on by a significant shortage of inventory.”

“There may be unintended consequences to new province-wide rent controls,” concluded Soper. “We need more family-sized units in the province’s cities; apartments with two or three bedrooms. Yet purpose-built rental projects are likely to focus on smaller bachelor or one-bedroom units, which tend to attract shorter-term tenants. The higher turn-over allows landlords to raise rates more frequently. This will put further upward pressure on the price of existing family-sized rental units.”

Full article link here.

Provincial and City Summaries and Trends

For more information visit: www.royallepage.ca

[1] Aggregate prices are calculated using a weighted average of the median values of all housing types collected. Data is provided by RPS Real Property Solutions.

[2] Urbanation Inc. report prepared for the Federation of Rental-housing Providers of Ontario, “Ontario Rental Market Study: Measuring the Supply Gap,” September 2017

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More Inventory Starting to Attract More Buyers

IT LOOKS LIKE THE WORST IS OVER FOR THE TORONTO HOUSING CORRECTION

Last month I spoke about how the Greater Toronto Area Real Estate Market is beginning to change shape and return to balance. Well, the evidence is in, as the number of new listings entered into The Toronto Real Estate Board’s MLS® System amounted to 16,469 in September – up by 9.4 per cent year-over-year.  But the real story is that total active listings stood at 19,021, a whopping 69% increase year-over-year.  TREB suggests that the improvement in listings in September compared to a year earlier is a sign that home owners are anticipating an uptick in sales activity as we move through the fall, or put another way, more inventory is starting to attract more buyers back to the market.

TREB announced that Greater Toronto Area REALTORS® reported 6,379 sales through TREB’s MLS® System in September, roughly the same amount as in August, but 35 per cent lower than September of last year.  In a balanced market, buyers take longer to make up their minds, as there is more product available to choose from.  Likewise, sellers need time to get adjusted to the new market reality.  Remember, the last few years were anything but “ordinary”.

Think of it this way.  Last year at this time, inventory (the number of active listings on MLS®) stood at approximately one month of sales.  So, on average, every home on the market was selling within a month or less, with multiple offers driving up the price paid due to the scarcity of supply.  Now that inventory is closer to 3 months supply, what this means is that 1 out of every 3 houses on average is selling within the month, and price is no longer being dictated by the frenzy we saw when homes were in such short supply.  So it makes sense to see that sales are about a third lower in September 2017 than they were in September of last year.  All of this is happening against a backdrop where average prices are still increasing, albeit at a lower rate than we saw during the run up.  The average selling price of a home in the GTA in September 2017 was $775,546 – up 2.6 per cent compared to September 2016.

However, the exception continues to be the condominium apartment market segment, where average prices were up on average by 23 per cent compared to last year. TREB reported in September that “tighter market conditions for condominium apartments follows consumer polling results from the spring that pointed toward a shift to condos in terms of buyer intentions”. In fact, condos accounted for almost 30 per cent of all MLS home sales across the GTA during the month of September, whereas detached homes – the most expensive market segment on average - accounted for a smaller share of overall transactions this year compared to last.

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Toronto Real Estate Market Returning to Balance

After an overheated performance for much of 2016 and 2017 which saw most homes selling at sky high prices, often well over list, and with multiple offers, the Greater Toronto Area real estate market is returning to balance as the summer closes.

Don’t believe what’s in the newspapers and media reports that Toronto’s real estate market is reaching a point where the bubble is going to burst.  It’s not supported by the facts.

The Toronto Real Estate Board reports in its latest figures, for the month of August, that sales of all homes recorded on MLS across the GTA were 6,357, down 34.8% year on year and that the average price only increased 3.0% to $732,292.

However, averages don’t tell the whole story, and there are pockets of real strength, particularly condominiums, where although sales were down 28.0% (mostly due to lack of supply), prices averaged 21.4% higher across the Greater Toronto Area.

Economic indicators are also pointing to fundamental strength, with real growth in the economy up 4.5% in the second quarter of 2017 and employment growth in the Greater Toronto Area of 1.3% during the month of July.  The impact of the recent (generally expected) Bank of Canada interest rate increases have yet to play out, but it's possible that they will not have a significant lasting impact on buyer sentiment, as the extreme “heat” that was being felt in the market has cooled somewhat as it returns to a more healthy balance of supply and demand.

Also, prior to the introduction of the Ontario Government’s Foreign Buyers tax last April, housing inventories in the Greater Toronto Area were running at some of their lowest levels in history, at or below 1 month’s supply, and this was reflected in the lofty month on month price increases experienced in what was truly a “sellers” market.

With the introduction of the new tax measures in April, active listings have begun to rise while sales have tapered off.  As a result, supply of homes has increased to a more healthy balance of 2.6 month’s supply in August, although down slightly from 3.1 month’s supply in July.

Typically though, during the summer months many sellers as well as purchasers are on the sidelines and activity wanes, while people are on vacation and out enjoying the good weather.  With summer drawing to a close, there is some optimism building, now the Greater Toronto Area real estate market has returned to a more healthy balance, that activity will pick up once again in the Autumn months.

When compared with other major Canadian cities, the Greater Toronto Area still has the lowest monthly inventory of homes, well below Montreal (7.8 months), Edmonton (5.5 months) and Calgary (4.1 months), and slightly lower than Vancouver (2.9 months),  meaning the Greater Toronto Area is still the strongest housing market in Canada.

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