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May 2008
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Housing market froth finally evaporating
After yet another blockbuster year for Canada’s housing markets in 2007, the much-anticipated housing market slowdown in Canada has arrived. The delayed arrival of softer housing markets can be partly attributed to recent mortgage innovation that has seeped into the Canadian market during the last two years. Higher loan-to-value ratios and longer amortization periods (now extending up to 40-years) prolonged the housing cycle by opening up the market to a wider range of prospective homeowners.The effects of mortgage innovation will cushion, but not prevent, Canada’s housing markets from cooling off as the current housing cycle gears down.
Tide turns in 2008
- Last year, major markets delivered a sixth consecutive year of 10% house price gains, sales-to-listings ratios held firmly in seller’s territory, and housing starts held above 220,000 units for a fourth year running as excess demand in the resale market spilled over into the new home market. But, housing markets are now on a clear cooling path.
- Calgary and Edmonton have moved from chart-toppers to bottom-of-the heap in only a matter of months on a range of key housing market indicators, including house prices and sales.
- Regina and Saskatoon continue to clock year-over-year price gains that are several multiples above the pace of their local wage growth. This lends evidence that current momentum is unsustainable,. with a similar fate to Alberta’s likely for both of these cities in a year’s time.
- Many of the middle-of-the-pack markets — like Toronto, Ottawa and Montreal — are maintaining their slow and steady cruising speed. House prices across much of central and eastern Canada are growing between 5% and 10% year-over-year.
No U.S. style correction
- Canada’s housing market is on much firmer footing compared to the U.S. market. The recent softening in house prices is part of a natural end-of-cycle slowdown that is expected to take hold through 2008.
- Several factors support our view that Canada’s market is simmering down but still in healthy shape, including Canada’s more conservative lending practices, healthy household finances, tight labour markets and a manageable inventory situation.
More conservative lending practices
- Canada engaged in much more conservative lending practices in this past cycle compared to the United States. Mortgage credit was extended, on average, to more capable buyers in Canada, leaving household balance sheets in better shape with mortgage quality strong and delinquency rates well below past cyclical peaks.
- Also, while U.S. sub-prime mortgages account for roughly 14% of the market, Canada’s sub-prime mortgage market is negligible, with the highest estimates showing a moderate 5% share.
- Speculative investing is also much tamer in Canada as investor-owned mortgages account for roughly 2% of the market compared to about 10% in the United States and the United Kingdom.
Labour markets are tight
- A strong labour market is a critical underpinning to healthy housing markets. Canada’s unemployment rate is holding at a 33-year low and average wages are outpacing inflation, meaning that homeowners are still realizing real increases in their monthly wages.
- Some slack in labour markets is expected as the economy cools, but outright job declines are unlikely as service sector gains are more than offsetting manufacturing sector losses.
Inventory overhang manageable
- The inventory situation is largely in check, with the exception of outliers like Edmonton, with unabsorbed inventories inching up but still comfortably below levels hit in the late 1980s housing market bubble.
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