monitoring dashboard - rbc · canadian housing health check provides rbc economics’ assessment of...

CANADIAN HOUSING HEALTH CHECK

Stress test-generated volatility raises near-term housing mar-

ket risks

Nation-wide: The probability of a steep and widespread housing downturn over the

next 12 months is still low. The recently implemented stress test for uninsured mort-

gages raised that probability slightly, however.

Local housing markets: Volatility generated by the new stress test eroded the near-

term risk profile of several major markets including Toronto, Vancouver and Calgary.

Yet none of these markets appear to be at risk of an imminent severe downturn.

Housing policy: Adjustment to the new stress test is fraught with uncertainty and

could pose short-term challenges for housing markets across Canada. In British Co-

lumbia, new market-cooling measures announced in the 2018 provincial budgets have

added a new layer of policy adjustment risk. Longer term, the tightening of mortgage

and housing policy will reduce risks.

Affordability: The high cost of homeownership in Vancouver, Toronto and, to a less-

er degree, Montreal represents a significant vulnerability for Canada’s major markets.

Interest rates: The prospect of higher interest rates remains a central risk factor

though it took a backseat in the last couple of months as longer-term rates paused

from their ascending trend. Indications that rates were inching higher again in mid-

April, if sustained, would exacerbate affordability issues in some of Canada’s major

markets.

Escalating prices in Canada’s hot markets: There are been positive developments

in Toronto where prices have moderated since mid-2017. In Vancouver, though, pric-

es have re-accelerated.

Unemployment: Labour market-related risks eased significantly in Alberta and, to a

lesser extent, Saskatchewan. The unemployment fell in both provinces over the

course of 2017. Labour market conditions are strong in the majority of other provinc-

es and generally provide solid support for local housing markets.

April 2018

Largest four housing markets

Toronto — Stretched affordability

remains a significant vulnerability,

especially in a rising interest rate en-

vironment. Recent mortgage policy

changes generated some turbulence

lately. Yet the market is healthier now

than it was a year ago when it clearly

overheated. It is now balanced, still

well supported by economic and de-

mographic fundamentals, and there

are few signs of overbuilding. Current

downward pressure on prices are likely

to ease in the coming months.

Montreal — This market is on a roll

and shows a generally positive risk/

vulnerability profile. Strength in the

local economy contributed to boost

housing demand and tighten demand-

supply conditions. Prices are acceler-

ating moderately. Gradual erosion of

affordability is a factor worth monitor-

ing closely.

Vancouver — Extremely poor afforda-

bility is the number one source of vul-

nerability. New market-cooling

measures announced in the 2018 BC

budget as well as recently implement-

ed mortgage stress test pose near-

term risks. Demand-supply conditions

remain relatively tight, however,

which tempers the risk of a material

price decline in the near term.

Calgary — The market recovery pro-

cess is uneven. The mortgage stress

test generated substantial market

volatility lately, raising near-term

risks. High condo inventories remain

an issue, as is slower population

growth. On a positive note, rising oil

prices should boost sentiment and

return the market on a upward trajec-

tory.

Canada Vancouver Calgary Toronto Montreal

Affordability

Resale market balance

Rental market balance

Interest rates

Labour market

Demographics

New home inventory - singles

New home inventory - multiples

Homes under construction - singles

Homes under construction - multiples

Significantly outside historical norms and posing much higher risk than usual

Modestly outside historical norms and posing moderately higher risk than usual

Within historical norms or not posing any immediate threat

Monitoring dashboard

Craig Wright | Chief Economist | 416-974-7457 | [email protected]

Robert Hogue | Senior Economist | 416-974-6192 | [email protected]

2

CANADIAN HOUSING HEALTH CHECK | APRIL 2018

Background

Canadian Housing Health Check provides RBC Economics’ assessment of key indicators of Canada’s housing market that are

deemed to offer early warning of potential imbalances. This monitoring exercise is one of the tools used regularly by RBC Econom-

ics to follow developments in this important sector of the Canadian economy. The report focuses on indicators that have been closely

correlated (leading or coincident) with housing downturns and significant home price declines during housing cycles in the past three

decades or so. While we believe that housing affordability and the sales-to-new listings ratio (and months’ inventory) are the best

indicators of market stress and price pressure, respectively, no single indicator provides perfect and accurate early warning signals of

impending trouble. Accordingly, Canadian Housing Health Check emphasizes a ‘dashboard’ approach to convey the point that trou-

ble in the housing market can arise from many directions and that it is imperative to monitor the situation broadly. This approach is

complemented by a detailed review of individual indicators that includes a graphical depiction of the current situation within a his-

torical context and a brief discussion of the rationale of our assessment.

About the graphics and risk ‘zone’ system The dashboard graphics display the current values of the indicators (dark blue bar) within zones that we consider safe (green), con-

cerning (yellow) or dangerous (red). The width of each graphics represents the range of values posted by the indicator during the past

30 years (or period of time available). The far left corresponds to the safest measure ever recorded and the far right, to the most ex-

treme imbalance reached historically. For most indicators, the left corresponds to low values but for some (sales-to-new listings ratio

and net immigration) to high values.

The yellow and red zones appearing in dashboard graphics and individual indicator charts generally were determined by analyzing

past housing downturns and constitute our estimations of thresholds above (or, in some cases, below) which market imbalances and

significant home price declines occurred at the national level in Canada. The yellow zone comprises a range of values that, histori-

cally, have been mostly associated with imbalances but not always with housing downturns (i.e. sustained price declines). In other

words, these values give somewhat ambiguous and sometimes ‘false’ signals. The red zone, however, comprises values that repre-

sent imbalances much more clearly and of larger magnitude. An indicator in the red zone should be considered a source of worry.

The farther to the right in the red zone in the dashboard graphics are the values, the more extreme is the imbalance, the more intense

is the stress exerted on the market and, ultimately, the more severe the potential correction.

The specific rules at the national level are as follows:

RBC Affordability Measure for the aggregate of all housing types: yellow threshold = 41.5% (0.3 standard deviations above

the long-term mean); and red at 45.1% (1.0 standard deviations above the mean).

Sales-to-new listings ratio: yellow threshold = 0.40; and red = 0.35.

Months of inventory: yellow threshold = 7.0; red = 8.5.

Rental vacancy rate: yellow threshold = 3.2% (long-term mean); and red = 3.7% (0.5 standard deviations above the mean).

Real 5-year bond yield relative to trailing 12-month average: yellow threshold = 1.0 percentage point (1 standard deviation

above the mean); red = 2.0 percentage points (2 standard deviations).

Unemployment rate relative to trailing 12-month average: yellow threshold = 0.41 percentage points (0.6 standard deviation

above the mean); red = 0.9 percentage points (1.5 standard deviations).

Net immigration per 1,000 population: yellow threshold = 6.5 (0.5 standard deviations above the mean); red = 5.0 (0.4 stand-

ard deviations below the mean).

Completed and unoccupied units per 1,000 population, singles and semis: yellow threshold = 0.29 (0.3 standard deviations

above the mean); red = 0.36 (1.3 standard deviation above the mean).

Completed and unoccupied units per 1,000 population, multiples: yellow threshold = 0.36 (the mean); red = 0.47 (0.9 stand-

ard deviation above the mean).

Housing under construction per 1,000 population, singles: yellow threshold = 2.11 (0.5 standard deviations from the mean);

red = 2.33 (1 standard deviation from the mean).

Housing under construction per 1,000 population, multiples: yellow threshold = 3.93 (0.5 standard deviations from the

mean); red = 4.58 (1 standard deviation from the mean).

The areas shaded in grey in the indicator charts correspond to housing downturns – i.e., periods during which home prices (as de-

fined as average prices of homes sold on the MLS system) fell by more than 5% from monthly peak to trough. It is important to note

that the precise timing of these downturns can vary depending on the home price measure used. The grey shaded areas, therefore,

should be seen as broad guidelines.

CANADIAN HOUSING HEALTH CHECK | NOVEMBER 2017

3


CANADA

Affordability

Near-term: negative

Medium-term: negative

Existing home market balance

Near-term: positive

Medium-term: neutral

Near-term: positive


Near-term: positive

Medium-term: positive

Demand fundamentals

Near-term: negative


Near-term: positive


Near-term: positive


Supply fundamentals

Near-term: positive


Near-term: positive


Near-term: positive


Near-term: neutral


Risk implications

RBC affordability measure- aggregate

Low High

Sales-to-new listings ratio

LowHigh

Months of inventory

Low High

Change in real 5-Year bond yields

Low High

Low High

Housing under construction per capita - singles

Low High

YellowHousing under construction per capita - multiples

Low High

Yellow

Rental vacancy rate

Change in the unemployment rate

Low High

Yellow

LowHigh

Yellow

Net immigration rate

Low High

YellowCompleted and unsold units per capita - singles and semis

Low High

YellowCompleted and unsold units per

capita - multiples

4


Affordability

CANADA


20

25

30

35

40

45

50

55

60

65

70

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

RBC affordability measure - aggregate

Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage

Ownership costs as % of household income, Canada

In our view, affordability is the most meaningful indicator of underlying

market stress. Other traditional metrics such price-to-income and price-to-rent ratios can be useful guides of market imbalance under many circumstances;

however, affordability is a superior gauge in the current environment because

it explicitly takes into account interest rates (the other measures don’t), which have been—and, in the near term, expected to remain—historically low.

The most recent reading of RBC’s aggregate housing affordability meas-

ure (48.3% in Q4 2017) suggests the presence of greater-than-average

market stress for buyers in Canada with the situation steadily deteriorat-

ing since the spring of 2015. Affordability is most stretched for single-

detached homes in Canada’s largest markets, although condo affordabil-

ity (41.1%) also has deteriorated significantly in the past year.

We estimate the ‘danger zone’ for the aggregate measure to be above 45.0%

nationally.

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Monthly, S.A.


Source: RBC Economics Research, Canadian Real Estate Association

Monthly, S.A., Canada


Buyer's market

Balanced market

Seller's market

The sales-to-new listings ratio is a reliable gauge of the degree of slack or

tightness in the resale market. When the ratio approaches, or is above 0.60, the market favours sellers and prices typically rise rapidly. When the ratio

approaches, or is below 0.40, the market favours buyers and prices come

under intense downward pressure. Anything in between is considered a bal-anced market and prices generally tend to rise modestly.

Canada-wide, the sales-to-new listings ratio settled within the range con-

sistent with balanced market conditions during most of 2017 after climb-

ing into seller’s market territory in 2016. Home resales dropped sharply

and new listings surged in the months that followed the introduction of

Ontario’s Fair Housing Plan in April 2017. The national ratio spiked

temporarily as markets rallied across the country late last year ahead of

the new stress test on January 1 though it has since returned to balance.

Historically, the largest price declines occurred when the ratio fell below

0.35.

0

1

2

3

4

5

6

7

8

9

10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Long-term average

Monthly, S.A., Canada

Months of inventory


The total inventory of homes for sale expressed as the number of months it

would take to sell them at the current pace of sales is another resale market balance indicator. Historical correlation with prices is difficult to establish

with precision, however, because the Canadian Real Estate Association has

published this indicator only since 2004.

Nonetheless, based on what track record is available, we estimate that down-

ward pressure on prices start to build at levels between 7.0 and 8.5 months,

and that severe pressure emerges at levels exceeding 8.5.

The rebound in new listings in Ontario since spring last year returned

the number of months’ inventory in Canada back to its long-run average

of 5.3 in February-March 2018 from historically low levels a year ago.

This level is consistent with continued price increases.

Demand-supply balance indicators for the existing home market, there-

fore, continue to suggest little in the way of any imminent large-scale

drop in prices in the national market.

0

1

2

3

4

5

6

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Rental vacancy rate

Annual:1988-2010; Semi-annual: 2011-currentSource: RBC Economics Research, CMHC

%, total CMAs, purpose-built apartment buildings of three units or more, Canada The rental vacancy rate has not correlated very closely with prices historical-

ly. However, we believe that the Canadian housing story will be very sensi-tive to the supply of new units into the marketplace, much of which (almost

entirely condos) will be directed toward the rental market. Therefore, this

gauge of market absorption in the rental segment should be monitored close-ly.

A main drawback of the vacancy rate as a monitoring tool is that it is pub-

lished only once a year (in October) by CMHC.

The latest data for October 2017 shows a drop to 2.7% at the national

level from 3.4% in 2016, which is slightly below the long-term average

(3.0%). The decline was widespread across the country.

We would consider a vacancy rate above 3.5% as a sign of oversupply in the

rental space.


5


Demand fundamentals

CANADA

Supply fundamentals

-4

-3

-2

-1

0

1

2

3

4

5

6

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percentage points, Canada

Real 5-year bond yields relative to trailing 12-month average

Source: RBC Economics Research, Bank of Canada, Statistics Canada

Surges in interest rates have been strongly associated with market downturns

and price declines in several housing cycles in the past 30 years in Canada.

A 100 basis-point rise relative to the trailing 12-month average would apply

intense downward pressure on the market and a 200 basis point surge would likely destabilize it and potentially cause a significant price decline.

The yield on the five-year Government of Canada bond stabilized in

early 2018 after climbing to its highest level in more than six years. The

recent slowing meant that the real yield was up just 17 basis points above

its 12-month trailing average in February, which no longer threatened to

shock the housing market.

RBC’s base case interest rate forecast calls for the overnight rate to rise

by another 100 basis points by mid-2019. RBC expects longer-term rates

to move up in tandem with short-term rates. This scenario would present

increasing risks to the housing market in the period ahead.

-2

-1

1

2

3

4

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percentage points, Canada

Unemployment rate relative to trailing 12-month average

Source: RBC Economics Research, Statistics Canada

Similarly, spikes of unemployment have been associated with housing down-

turns in the past 30 years, although they have tended to lag price declines rather than lead them.

We estimate that a 0.25 percentage point increase in Canada’s unemployment

rate relative to the trailing 12-month average would stress the market moder-

ately, but that a full percentage-point surge would threaten its stability.

The unemployment rate has trended downward since the beginning of

2016 and continued to do so in early 2018. It matched the lowest level

since the mid-1970s in Q1/2018. The rate has been below its trailing 12-

month average since May 2016.

Labour market conditions pose little risk nationally at this point. Some

areas of the country show a higher degree of risk; however, there has

been an easing of such in Alberta with that province’s unemployment

rate coming down noticeably since early 2017.

2

4

6

8

10

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Trailing 4-quarter sum, Canada, per 1,000 population

Net immigration rate


Net immigration into Canada is another indicator that has not correlated

closely with housing downturns or price declines historically; however, given the boom in condo construction in major Canadian cities, any sign that the

strong inflow of immigrants is slowing would be concerning.

The rate of net immigration in Canada (measured per 1,000 population)

has surged since late-2015, and this continued to be the case by the late

stages of 2017.

The rate reached a multi-decade high of 10.3 in the fourth quarter of 2017,

very comfortably above the 6.5 threshold signalling some degree of vulnera-

bility.

The rate is likely to remain elevated in light of the federal government

boosting its target for new permanent residents from 300K in 2017 to

310K in 2018, and further to 330K in 2019 and 340K in 2020.

0.0

0.1

0.2

0.3

0.4

0.5

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Units per 1,000 population, Canada, n.s.a.

Completed and unsold units - singles and semis

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

A telltale of an overbuilt market is the number of units recently completed but

remaining unsold.

We segment the Canadian market into singles and multiples to identify poten-

tial sources of trouble.

On the single-family homes side, the unsold inventory picked up slightly

on a per 1,000 population basis since the middle of last year but, at 0.22

in February, remains historically low—still well below the long-run aver-

age of 0.26. There are no signs of any excess supply of new single-

detached units in Canada at this stage.

We would consider the situation concerning at 0.29 units and dangerous at

0.36 units.

6


Supply fundamentals

CANADA

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average


Completed and unsold units - multiples


On the multi-unit dwellings side, market absorption has been solid

throughout 2016, 2017 and early 2018. This helped to draw down the

unsold inventory markedly in Canada. The rate of unsold units eased to

0.26 units per 1,000 population in February 2018, down from a 19-year

high of 0.41 units in May 2015.

The latest read of this indicator was below the long-term average (0.36)

and well below the 0.48 threshold that would signal a high degree of

excess.

Overall, the inventory of completed but unsold condos evolved construc-

tively in the past two years in Canada and is no longer a source of con-

cern.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average


Housing under construction - singles


There’s been a lot of chatter in recent years about the number of housing units

under construction in Canada.

We remain unconcerned about overbuilding in the single family home

segment, where levels remain well below historical averages (when meas-

ured on a per 1,000 population basis).

In some of Canada’s largest markets, demand for single family homes

has outstripped supply significantly.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average


Housing under construction - multiples


On the multiples side, however, there are still record-high levels of condo

units under construction in Canada.

There were 6.6 multi-unit dwellings per 1,000 population under construc-

tion in Q1/18.

Strictly speaking, this level is well into the ‘high risk zone’ (4.6 units or

higher). Yet in the context of tight demand-supply balances for condos in

markets such Vancouver and Toronto, strong construction should be

seen as being part of the solution to address affordability issues.

Most of the units being built are in the Toronto (31% of total) and Van-

couver (18%) areas.

Strong condo construction in large part reflects structural changes that

arose from policy (e.g. rules limiting urban sprawl) and affordability

(condo apartments are the more affordable housing type) considerations,

and therefore, represents a market share gain over single-family homes.

Nonetheless, the prospects for high levels of condo completions in the

period ahead potentially entail a degree of absorption risks over the me-

dium term.


7


GREATER TORONTO AREA

Affordability

Near-term: negative



Near-term: positive


Near-term: positive


Near-term: positive


Demand fundamentals

Near-term: negative


Near-term: positive


Near-term: positive


Supply fundamentals

Near-term: positive


Near-term: positive


Near-term: positive


Near-term: neutral


Risk implications


Low High


Low High


LowHigh

Months of inventory -

OntarioLow High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

YellowCompleted and unsold units per

capita - multiples

Low High


Low High


8


Affordability in the GTA has been on a deteriorating trend since 2012

though this trend accelerated markedly since 2015. RBC’s measure is

now in a zone that historically has been associated with a high risk of an

ensuing negative outcome. The fact that RBC’s measure improved slight-

ly in Q4/2017 didn’t really change the big picture.

Most of the affordability pressure is concentrated in the single-family

home side of the market; however, stress has increased in the condo seg-

ment as well, with condo prices escalating rapidly in the past year.

Stretched affordability is poised to become a more pressing issue now

that interest rates have started to rise.

The Toronto-area market is more sensitive to a substantial rise in inter-

est rates than most markets in Canada due to its high prices.

Ontario’s Fair Housing Plan in April 2017 prompted buyers to move to

the sidelines and sellers to list more properties for sale in the months that

followed. This caused demand-supply conditions to snap back sharply

into balance after heavily favouring sellers from 2015 to early-2017.

Buyers and sellers had largely adjusted to the plan by the fall of 2017.

Then OSFI’s announcement of a new stress test for uninsured mortgages

effective January 1, 2018, generated further market volatility.

Downward pressures on prices continue to prevail at this stage. They are

largely concentrated in the single-detached segment. The benchmark

price rose month-to-month in both February and March 2018, which

could be a sign that prices will bottom out soon in the area.

A moderate, controlled decline in prices should be seen as a positive de-

velopment that will bring some much needed affordability relief.

Affordability



0

1

2

3

4

5

6

7

8

9

10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Long-term average

Monthly, S.A., Ontario

Months of inventory


The easing of earlier demand-supply tightness is also apparent in the rise

in inventories of homes for sales (active listings), which had plummeted

to historically low levels in early-2017.

Data available at the provincial level shows that the number of months’

inventory in Ontario rose to 2.9 in March 2018 from its lowest point (1.5

months) on record in March 2017. The latest figure is still significantly

lower than the long-run average of 3.7.

Separate data from the Toronto Real Estate Board show that the number

of months of inventory in the Toronto area was 2.3 in March 2018, up

from 1.0 in March 2017.

Concerns that Toronto’s condo boom would flood the rental market and

cause vacancies to rise have not materialized.

GTA’s rental market has been very tight in recent years and the vacancy

rate fell further to 1.0% by October 2017 —a 16-year low.

Toronto Real Estate Board statistics showed that condo rental activity

was strong historically in Q1/2018 but dropped 7.5% from a year ago.

The decline in part reflected fewer units available for rent (down 11.8%).

Average rent continued to rise at a brisk pace (by more than 11% y/y for

a one-bedroom apartment).

So far, there is little evidence that condo investors who rent out their

units have overestimated rental demand.

20

30

40

50

60

70

80

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average



Ownership costs as % of household income, Toronto

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Monthly, S.A.



Monthly, S.A., Toronto


Buyer's market

Balanced market

Seller's market

0

1

2

3

4

5

6

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Rental vacancy rate

Source: RBC Economics Research, CMHC

%, purpose-built apartment buildings of three units or more, Toronto


9


Labour market conditions in the GTA continue to be generally support-

ive for the area’s housing market.

Toronto’s unemployment rate remains on an eight-year long downtrend.

It fell to its lowest point ever in March 2018 (5.8%) in more than 17

years.

Labour market-related risks are muted at this point.

Demand fundamentals


Supply fundamentals

-2

-1

1

2

3

4

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percentage points, Toronto



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Y/Y % change in the 15+ population, Toronto

Adult population growth


Solid demographic fundamentals have long supported GTA’s housing

market.

Those fundamentals improved since early 2016, following a period of

softening in 2014-2015.

The rate of growth in adult population picked up from 1.6% in mid-2015

to 2.2% most recently, thereby exceeding GTA’s long-term average of

1.9%.

A rate below 1.5% would be a source of concern.

Inventories of newly completed and unsold the single-family continue to

be historically low despite trending slightly higher in the past five years.

There are no indications of overbuilding of single-family homes in the

area at present.

Previously high inventory of recently completed and unsold condo units

is no longer a concern in the Toronto area.

Absorption of newly built condos has been brisk in the GTA since late

2015 and the unsold inventory is now effectively entirely depleted.

The unabsorbed inventory fell from a 22-year peak of 0.58 units per

1,000 population in May 2015 to an all-time low of 0.05 units in February

2018. This is well below the 0.27 threshold signalling the potential for

mild excess supply.

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Units per 1,000 population, Toronto, n.s.a.



0.0

0.2

0.4

0.6

0.8

1.0

1.2

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




10


Supply fundamentals


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




The number of single-detached units under construction in the GTA has

been falling modestly since last spring as builders slowed down the pace

of new starts following Ontario’s Fair Housing Plan. The most recent

level of single-unit construction activity was well below the long-term

average for the area when measured in per 1,000 population terms.

There are no signs of any impending single-unit supply glut at this stage.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




The number of multi-unit dwellings under construction continues to be

historically high, although it has moderated compared to three years ago.

Expressed on a per 1,000 population basis, multi-unit construction re-

mains in a high risk zone; however, the potential threat to the market is

tempered by the low level of unsold condo inventories and solid demand

in the existing condo market.

The main risk from high levels of construction is that many units could

reach the completion stage in a short time span, thereby potentially cre-

ating absorption issues in the condo resale and/or rental markets. So far,

both of these markets have absorbed the increased supply quite handily.


11


GREATER MONTREAL AREA

Affordability

Near-term: neutral



Near-term: positive


Near-term: neutral


Near-term: positive


Demand fundamentals

Near-term: negative


Near-term: positive


Near-term: positive


Supply fundamentals

Near-term: positive


Near-term: positive


Near-term: positive


Near-term: neutral


Risk implications


Low High


Low High


LowHigh


QuebecLow High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

YellowCompleted and unsold units per capita - multiples

Low High


Low High



Low High


Low High


LowHigh


QuebecLow High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

YellowCompleted and unsold units per capita - multiples

12


Affordability



Existing home supply expressed as number of months’ inventory shows a

declining trend in Quebec since early 2015 from elevated levels. This

metric was virtually back to its long-run average of 9.1 by March 2018,

and on the edge of the low risk zone.

Local real estate board data show that the number of months’ inventory

was relatively low at 5.9 in Q1/2018 for single-detached homes and at a

balanced level of 8.9 for condos.

These are signs of firming marked conditions in Montreal.

The risk of oversupply in Montreal’s rental market diminished signifi-

cantly last year. The rental vacancy rate fell from 3.9% in October 2016

to a four-year low of 2.8% in October 2017. This was in low-risk territo-

ry.

That being said, a record-high 10,000 purpose-built rental units are un-

der construction in the Montreal area. Completion of these units may put

upward pressure on the vacancy rate in the coming years.

20

25

30

35

40

45

50

55

60

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average



Ownership costs as % of household income, Montreal

Affordability deteriorated gradually in the Montreal area since early

2015 and this continued to be the case in 2017. Still, affordability remains

generally manageable for buyers at this point.

RBC’s aggregate measure was 44.1% in Q4/17, up 1.4 percentage points

from a year ago and within a range consistent with moderate risk.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Monthly, S.A.



Monthly, S.A., Montreal


Buyer's market

Balanced market

Seller's market

Demand-supply conditions in the Montreal area have tightened steadily

since 2014. The sales-to-new listings ratio climbed to a multi-decade high

of 0.71 in January 2018 before easing to 0.64 in March.

Home resales were up by 7% in the first quarter of 2018. Robust sales

activity took place amid a continued decline in the number of homes put

up for sale each month, which resulted in a significant drawdown in

inventories across all housing categories.

The upward trend in the sales-to-new listings ratio suggests that the rate

of price increases may strengthen in the period ahead, and doesn’t point

to any imminent risk of a sharp decline.

0

2

4

6

8

10

12

14

16

18

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Long-term average

Monthly, S.A., Quebec

Months of inventory


0

1

2

3

4

5

6

7

8

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

long-term average

Rental vacancy rate


%, purpose-built apartment buildings of three units or more, Montreal


13


Montreal’s job market has been very strong since mid-2016. The unem-

ployment fell below 6% at the start of 2018, its lowest point on records

dating back to 2001.

The decline in Montreal’s unemployment rate offers strong support for

the housing market and therefore has been a significantly positive devel-

opment from a risk point of view.

Demand fundamentals


Supply fundamentals

Following a two year-long period of easing growth, Montreal’s adult

population has grown at a faster rate since mid-2015, marginally exceed-

ing its long-term average of 1.0% most recently.

Overall demographic conditions currently pose little risks for the market

at this stage.

-2

-1

1

2

3

4

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percentage points, Montreal



0.0

0.4

0.8

1.2

1.6

2.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Y/Y % change in the 15+ population, Montreal



0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Units per 1,000 population, Montreal, n.s.a.



There continues to be very few newly completed single-family homes that

are unsold in the Montreal area.

We see no evidence of an overbuild in this market segment.

0.0

0.4

0.8

1.2

1.6

2.0

2.4

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




On the multi-unit dwelling side, conditions improved noticeably since

2015 with the unsold inventory declining markedly.

The unsold inventory rose slightly late last year and early this year but,

at 0.61 units per 1,000 population in February 2018, it remains below the

long-term average and within the low-risk zone.

14


Supply fundamentals


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




The risk of any overbuilding of single-family homes in the short term is

extremely remote.

Current levels of construction are significantly below long-run averages

and well within the ‘safe zone’.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




The number of multi-unit dwellings under construction climbed to a

record high in the Montreal area at the start of 2018. This in large part

reflects a significant increase in purpose-built rental apartment projects.

Condo units under construction also rose since mid-2017 but remain

below their peak reached between 2012 and 2014.

A potential risk of overbuilding multi-unit dwellings is present in Mon-

treal.

Yet strong construction activity of higher-density housing categories

partly reflects a structural shift from single-detached toward multiples.

This shift is supported by urban development policy and affordability

advantage relative to single-family homes.


15


GREATER VANCOUVER AREA

Affordability

Near-term: negative



Near-term: positive


Near-term: positive


Near-term: positive


Demand fundamentals

Near-term: negative


Near-term: positive


Near-term: negative


Supply fundamentals

Near-term: positive


Near-term: positive


Near-term: neutral


Near-term: neutral


Risk implications


Low High


Low High


LowHigh

Months of inventory - BC

Low High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

Completed and unsold units per

capita - multiples

Low High


Low High

Housing under construction per capita - multiples


Low High


Low High


LowHigh

Months of inventory - BC

Low High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


16


Affordability



Some easing market conditions is also visible at the provincial level in

recent months. The number of months’ inventory picked up slightly so

far this year after remaining largely stable throughout 2017.

Still, the inventory remains historically low.

This indicator is consistent with the presence of upward price pressure in

the province.

Conditions remain very tight in Vancouver’s rental market.

The area’s rental vacancy rate was 0.9% in October 2017—among the

lowest ones in the country—up marginally from 0.7% in October 2016.

Vancouver’s rental market, therefore, shows no evidence of any looming

surplus that would cause concerns for the home ownership market.

20

30

40

50

60

70

80

90

100

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average



Ownership costs as % of household income, Vancouver

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Monthly, S.A.



Monthly, S.A., Vancouver


Buyer's market

Balanced market

Seller's market

Housing affordability remains extremely poor and represents a major

vulnerability for the Vancouver-area market.

Affordability stress is found in both single-family and condo apartment

categories; however, it is far more intense in the former.

At 85.2% in Q4/2017, RBC’s aggregate affordability measure for the

area was at its worst level on record.

Poor affordability is likely among the factors that contributed to a signif-

icant moderation in home resales in the area since a peak was reached in

the winter of 2016. Policy changes—including the 15% foreign-buyer tax

implemented in August 2016, OSFI’s new stress test and a slew of addi-

tional market-cooling measures announced in the 2018 BC budget—as

well as rise in interest rates also likely contributed significantly.

Demand-supply conditions generally remain tight in the Vancouver area,

though they’ve eased somewhat in the last couple of years.

After spending much of 2017 into seller’s market territory, the sales-to-

new listings ratio has been volatile so far in 2018—surging to 0.71 in

January before dropping to balanced territory in February (0.49) and

March (0.47).

This volatility is testament to the state of flux in which the market finds

itself at this juncture in light of the market-cooling measures introduced

in the past few months.

While the current balance in the market minimizes the odds of an immi-

nent price decline, further loosening of demand-supply conditions cannot

be ruled out in the near term.

0

2

4

6

8

10

12

14

16

18

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Long-term average

Monthly, S.A., British Columbia

Months of inventory


0

1

2

3

4

5

6

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Rental vacancy rate

Source: RBC Economics Research, CMHC

%, purpose-built apartment buildings of three units or more, Vancouver


17


The job situation in Vancouver continues to be very positive with the

jobless rate falling to its lowest level (4.0%) in 10 years in March.

Labour market developments do not pose any immediate threat to the

housing market. On the contrary, they offer substantial support current-

ly.

Demand fundamentals


Supply fundamentals

Adult population growth has slowed in the past year from 1.9% y/y in

March 2016 to around 1.4% since June 2017. The rate of growth has

dipped marginally below the threshold (1.5%) signaling the presence of

elevated risks.

Any sustained period of slower-than-usual growth in population could

cause some issues for the high levels of housing construction in the area.

-2

-1

1

2

3

4

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percentage points, Vancouver



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Y/Y % change in the 15+ population, Vancouver



0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Units per 1,000 population, Vancouver, n.s.a.



Absorption of single-detached and semi-detached units has been quite

strong since early 2014, although there has been some modest easing in

2018. The number of recently completed and unsold units has risen mod-

erately from 0.31 units per 1,000 population in April 2016 to 0.50 in Feb-

ruary 2018—still well into the ‘safe zone’ and below the long-range aver-

age of 0.60 units.

The Vancouver-area market shows few signs of being overbuilt at this

point or becoming so in the near term.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




Similarly, the situation on the multi-unit dwelling side of the market

remains safe.

The number of completed and unsold units has trended lower since early

2014, reaching a nine-year low in August 2016 and staying flat since then.

Historically-low inventories have persisted despite an increase in condo

unit completions over the course of 2017 and early 2018.

The Vancouver condo market does not appear to be overbuilt at this

point.

-2

-1

1

2

3

4

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percentage points, Vancouver



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Y/Y % change in the 15+ population, Vancouver



0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




18


Supply fundamentals


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




Builders responded to earlier strong demand for single-family homes in

the Vancouver area, which has boosted the number of units under con-

struction to the highest levels in 23 years by the fall of 2017.

The cooling of demand for high-priced properties more recently led to a

slight easing of single units under construction in early 2018.

On its own, a historically-high number of single-family homes under

construction suggest an increasing (albeit moderate) risk of oversupply in

the period ahead; however, still-low inventories of unsold single-detached

homes helps to mitigate that risk.

Fueled by very strong housing starts in 2016 and 2017, the number of

multi-family units under construction (on a per 1000 population basis)

rose to a new record level, thereby signaling a greater-than-usual risk of

imbalance in this market segment.

Such risk is tempered by the tight market conditions in the condo resale

market segment and low inventories of newly built and unsold units.


19


CALGARY AREA

Affordability

Near-term: positive



Near-term: neutral


Near-term: negative


Near-term: negative


Demand fundamentals

Near-term: negative


Near-term: positive


Near-term: negative


Supply fundamentals

Near-term: positive


Near-term: negative


Near-term: positive


Near-term: neutral


Risk implications


Low High


Low High


LowHigh


AlbertaLow High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

Completed and unsold units per capita - multiples

Low High


Low High


20


Affordability

CALGARY AREA


The overall inventory of homes for sale in Alberta jumped in early 2018.

The number of months’ inventory surged to 7.3 in March from 5.3 in

December. The latest reading points toward higher-than-usual risk for

the market though the situation may be exaggerated somewhat by the

volatility around the new stress test.

If sustained, high levels of active listings relative to sales could rekindle

downward pressure on prices.

Calgary’s rental market appears to be over-supplied.

The rental vacancy rate surged to a record high of 7.0% in October 2016,

up from 5.3% in October 2015 and just 1.4% the year before that.

Such elevated vacancy rate raises significant downside risks for rent

values in the area and revenue prospects for condo investors.

Indeed, CMHC figures show that average apartment rent fell between

2.2% and 6.4% in 2016 depending on the size of the unit.

20

30

40

50

60

70

80

90

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average



Ownership costs as % of household income, Calgary

Housing affordability continues to be a generally constructive factor for

the Calgary market despite deteriorating slightly since early 2015.

RBC’s aggregate measure for the area, at 42.1% in Q4/2017, remains

well within the safe zone.

The Calgary market still faces a number of issues; however, affordability

is unlikely to be one of them.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Monthly, S.A.



Monthly, S.A., Calgary


Buyer's market

Balanced market

Seller's market

Home resale activity surged late last year ahead of the new stress test for

uninsured mortgages and then dropped significantly in the early months

of 2018.

The post-stress test cooling contributed to loosen demand-supply condi-

tions, though they remained balanced. The sales-to-new listings ratio

eased from 0.63 in December 2017 to 0.44 in February 2018—within

balanced market territory.

A sharp increase in active listings (up 25% y/y in March, according to the

Calgary Real Estate Board), however, suggests that the inventory of

homes of sale has become more plentiful, especially for condo apart-

ments.

Price pressures continue to be largely muted at this juncture, although

some downside risks persist—primarily in the condo segment.

0

2

4

6

8

10

12

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Long-term average

Monthly, S.A., Alberta

Months of inventory


0

1

2

3

4

5

6

7

8

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Rental vacancy rate


%, purpose-built apartment buildings of three units or more, Calgary


21


Calgary’s labour market improved significantly since the middle of 2016.

Employment rose by a solid 2.8% over the 12 months ending in March

2018, and the jobless rate is down by almost 2 percentage points since the

peak in November 2016 to 8.2% most recently.

The improvement in labour market conditions has been a significant

positive development for the area’s housing market.

Demand fundamentals

CALGARY AREA

Supply fundamentals

Past deterioration in job prospects contributed significantly to a slow-

down in Calgary’s adult population growth—from a recent cyclical high

of 4.0% in early 2014 to a 23-year low of 1.4% in September 2017.

Population has since picked up slightly to 1.6% by March 2018.

While demographics-related risks remain high in the Calgary area, the

labour market’s strengthening in the past year bodes well for a further

improvement in demographic trends.

-2

-1

1

2

3

4

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percentage points, Calgary



0.0

1.0

2.0

3.0

4.0

5.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Y/Y % change in the 15+ population, Calgary



0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average

Units per 1,000 population, Calgary, n.s.a.



There are few signs of overbuilding in the single-detached segment in

Calgary.

The number of unsold single-detached and semi-detached remains his-

torically low on a per 1000 population basis.

There was a slight increase in the past year because single-family home

starts partially rebounded after two years of dramatic declines.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




The situation is very different in the multi-unit segment where the num-

ber of unabsorbed units surged since the spring of 2015 (when Calgary

arguably had a supply shortage) to record-high levels throughout most of

2017 and early 2018.

The stock of unsold units was driven higher by sharp increases in condo

apartment completions in 2015 and 2016 at a time when demand turned

cold.

The completed and unsold inventory rocketed past the long-term average

(on a per 1000 population basis) for the area and deep into the high risk

zone.

There is strong evidence of surplus in this segment of the Calgary mar-

ket.

22


Supply fundamentals

CALGARY AREA

0

1

2

3

4

5

6

7

8

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




A partial rebound in starts last year boosted the unsold single-detached

inventory slightly though the latter still poses minimal risks of destabiliz-

ing the market.

The scaling back of single-detached home starts in 2015 and 2016 con-

tributed to a significant decline in the number of units under construc-

tion to historically low levels.

0

2

4

6

8

10

12

14

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




The risks associated with current levels of multi-unit dwelling construc-

tion are contained. These risks, in fact, diminished very slightly so far

this year.

This marked a significant change from two to three years ago when the

number of multi-unit dwelling construction reached very high levels

following the starts of several condo projects initiated during boom in

2013 and 2014. The wave of condo units started in 2014 has now exited

the construction ‘pipeline’.

The material contained in this report is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, without express authoriza-tion of the copyright holder in writing. The statements and statistics contained herein have been prepared by RBC Economics Research based on information from

sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This publication is for the infor-

mation of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

®Registered trademark of Royal Bank of Canada.

©Royal Bank of Canada.

monitoring dashboard - rbc · canadian housing health check provides rbc economics’ assessment of...

Documents