Shorter than anticipated housing market correction puts Toronto back on track
- 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 released today, 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.”
Soper noted that rising interest rates and a strong Canadian dollar should help to keep a lid on major market price appreciation.
“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.
“A severe shortage of listings introduced unsustainable home price inflation into our two largest markets beginning in 2015,” commented Soper. “Affordability eroded rapidly, concerned policy makers reacted with measures to slow demand, and sales volumes plummeted. Market corrections were triggered in Vancouver first, and some ten months later, in Toronto.”
“Toronto home prices are much lower than those we see in Vancouver, and the overall size of the market is considerably larger,” he continued. “Waning foreign investment should impact the Toronto market less severely. We expect the correction to be shorter in comparison to what was experienced last year in B.C.’s Lower Mainland.”
According to the Royal LePage Peak Millennial Survey released in August 2017, members of the largest cohort of the millennial demographic, or “peak millennials,” are concerned about high home values in Canada’s largest urban markets and job uncertainty in other regions. Eighty-seven per cent of Canadians aged 25 to 30 believe homeownership is a good investment, yet only 57 per cent believe they will be able to afford a house within the next half decade. Consequently, though 61 per cent of peak millennial purchasers would prefer to buy a detached home, only 36 per cent believe that they will realistically be able to find a property within the market segment. This has led many of these young people to look for property in the more affordable condominium category.
“In our largest urban centres, condos are seen by many young home buyers as the last bastion of affordability,” explained Soper. “We expect single home buyers, couples or families with one child to favour condominium living. With the arrival of a second child, many young families will still follow their parents’ footsteps and head to the suburbs.”
“Regardless of where they live, the sheer number of peak millennials in Canada will shape our real estate markets over the next decade. Developers and planners will certainly respond with housing product that meets the needs of this influential cohort of real estate consumers,” added Soper.
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.
“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.”
Provincial and City Summaries and Trends
Forecasters continue to raise their expectations for British Columbia’s growth, with the province poised to lead or come close to leading all provinces in GDP this year, creating new jobs and stimulating growth within the province’s residential real estate market. While the newly-elected NDP government released their first budget update, which included increases in the top marginal income tax and corporate tax rates, these hikes only put B.C. on par with other provinces, not above them. As well, the government is bolstering their already-robust social programs and infrastructure, which will allow them to entice more Canadians into the region in search of a new home.
During the third quarter of 2017, the aggregate price of a home in Greater Vancouver increased 2.5 per cent year-over-year to $1,229,133. Over the same period, the City of Vancouver saw an increase of 2.2 per cent to $1,439,652. Meanwhile, the regions of Langley, Surrey, North Vancouver, and Richmond saw third quarter price increases of 9.2 per cent, 6.3 per cent, 4.5 per cent and 1.4 per cent, to $831,283, $796,466, $1,417,226, and $1,103,064, respectively.
Alberta’s economy continues to rebound from its recession, and drilling activity has come back from last year’s levels. The price of West Texas Intermediate oil has averaged over $49 USD per barrel this year, and the Alberta government is forecasting a price of $55 USD per barrel in its 2017-18 budget. Over the past year, Alberta has added 13,000 jobs, and full-time employment has grown by 31,500. When looking to the housing market, many regions in the province have benefited from this recovery, with the aggregate price of a home in Calgary and Edmonton rising 5.0 per cent and 4.0 per cent year-over-year to $479,211 and $389,330, respectively.
The improvement in the energy sector is also helping Saskatchewan’s economy, which is experiencing an additional lift from the strengthening U.S. economy. This has been partially offset by soft commodity prices, like potash, and its unemployment rate creeping up. Over the past year, Saskatchewan lost 1,400 jobs, although the bulk of these were in part-time positions. Together, these trends slightly dampened the province’s real estate market during the third quarter of 2017, with the region witnessing modest home price declines in its largest cities. Over the quarter, the aggregate home price in Regina decreased 1.9 per cent year-over-year to an aggregate price of $327,636, while the aggregate price of a home in Saskatoon fell 2.4 per cent to $377,191.
Manitoba’s economy continues to track at the national average, but key indicators reflect a mixed picture. For the first two-thirds of the year, Manitoba’s housing starts were up by 78 per cent and urban housing starts were up by 58 per cent, with both representing the strongest gains of any province. As of September, Manitoba’s unemployment rate was 5.5 per cent, well below the national average of 6.2 per cent. On the other hand, at 3.1 per cent, Manitoba’s seasonally-adjusted retail sales gains for the first half of 2017 were less than half of the national average, and exports to the province’s largest importer, the U.S., declined by 6 per cent over the same period. Despite a mixed picture from other indicators, the housing sector is proving unambiguously strong. In the third quarter, Winnipeg’s aggregate home price rose by 5.5 per cent year-over-year to $305,413.
The economic expansion that has been powering Ontario for the past couple of years has accelerated in 2017, and some forecasters are upping their expectations for growth. This has translated into more jobs, with the September unemployment rate falling to 5.6 per cent, representing the lowest level seen in the region in 16 years. Conversely, the biggest drag on Ontario’s economy for the majority of this year has been its housing market, which has seen a decrease in sales activity on the heels of high price appreciation, the implementation of new regulations from the provincial government and the Bank of Canada’s moves to hike interest rates.
While price appreciation has recently moderated to healthier levels on a quarter-over-quarter basis, in the third quarter of 2017, home values across the Golden Horseshoe continued to show substantial year-over-year gains, thanks in part to significant price increases experienced at the beginning of the year. The aggregate price of a home in the Greater Toronto Area increased 21.7 per cent to $860,295, while the price of a home in the City of Toronto rose 21.8 per cent to $861,397. Home prices in the surrounding GTA regions saw significant year-over-year increases, with suburbs such as Richmond Hill, Oshawa, Vaughan, Markham and Oakville posting increases of 17.5 per cent, 26.8 per cent, 26.5 per cent, 22.2 per cent and 21.9 per cent to $1,288,411, $572,177, $1,099,899, $1,108,943 and $1,145,644, respectively. Regions such as Hamilton and Kitchener/Waterloo/Cambridge were among the province’s hot spots, with year-over-year price increases of 27.9 per cent and 28.0 per cent, to $548,521 and $483,133, respectively, while Niagara/St. Catharines and London home prices rose 20.4 per cent, and 19.8 per cent to $372,717 and $354,466, respectively over the same period.
Ottawa is turning out to be a major economic success story in 2017, given the heightened levels of hiring by the federal government. As of September, the city’s 5.8 per cent unemployment rate sits below the national average, and it appears to be one of the few cities that has shrugged off the province’s new housing rules. Over the quarter, the aggregate price of a home in Ottawa increased by 7.9 per cent year-over-year to $441,453.
Quebec is now in the midst of what economists, and the province’s Minister of Finance, refer to as a “virtuous circle.” The province’s economy has been improving over the last few years, and confidence among businesses and individuals is rising, with both choosing to spend and invest, creating jobs and further stimulating the economy. Furthermore, the region is increasingly becoming a technology centre of excellence attracting industry giants such as Google, Amazon, Facebook and recently, Samsung. Technology is a growing sector for employment in the region and it should positively affect demand in the real estate market over the next few years.
In the third quarter of 2017, the aggregate price of a home in the Greater Montreal Area rose 6.6 per cent to $384,055. Within the region, Montreal Centre saw the highest year-over year home price appreciation with an increase of 14.3 per cent to $511,129, and home prices in Montreal West rose by 5.4 per cent over the same period to $422,515. Year-over-year, home prices in Quebec City and Sherbrooke increased 3.1 per cent and 4.2 per cent to $300,835 and $246,660, respectively, while home prices in Trois-Rivières fell 3.3 per cent over the same period to $200,080.
As Canada heads into the final quarter of the year, all provinces appear to be growing, with the exception of Newfoundland and Labrador, which is still decisively in the midst of a recession. Large oil projects in the province are coming to an end and provincial revenues are coming in far below expectations. At 15.1 per cent as of September Newfoundland and Labrador’s unemployment rate is more than double the national average, creating less of a demand for large purchases, like housing. In the third quarter, the aggregate price of a home in St. John’s decreased 0.8 per cent year-over-year to $326,410.
In the rest of the Atlantic provinces, economic conditions in New Brunswick are proving to be solid this year, but some forecasters feel that the province is particularly vulnerable to trade conflicts with the U.S., especially in regard to softwood lumber. Home prices in Saint John rose 3.2 per cent year-over-year to $211,294, while home prices in Fredericton and Moncton fell 1.0 per cent and 1.9 per cent to $235,572 and $177,261, respectively. Although the economic growth of Nova Scotia is likely to be well under the national average over the next few years, many are referring to Halifax as a “boom town” because of the city’s base of colleges and universities, access to affordable homes and desirable quality of life. Over the quarter, Halifax saw an aggregate home price increase of 5.5 per cent year-over-year to $320,405. Prince Edward Island has not been as affected by the drop in oil prices when compared to the other Atlantic provinces, and home prices in Charlottetown saw a year-over-year increase of 4.4 per cent to $234,990.
About the Royal LePage House Price Survey
The Royal LePage House Price Survey provides information on the three most common types of housing in Canada, in 53 of the nation’s largest real estate markets. Housing values in the House Price Survey are based on the Royal LePage National House Price Composite, produced quarterly through the use of company data in addition to data and analytics from its sister company, RPS Real Property Solutions, the trusted source for residential real estate intelligence and analytics in Canada. Commentary on housing and forecast values are provided by Royal LePage residential real estate experts, based on their opinions and market knowledge.
About Royal LePage
Serving Canadians since 1913, Royal LePage is the country’s leading provider of services to real estate brokerages, with a network of over 17,000 real estate professionals in more than 600 locations nationwide. Royal LePage is the only Canadian real estate company to have its own charitable foundation, the Royal LePage Shelter Foundation, dedicated to supporting women’s and children’s shelters and educational programs aimed at ending domestic violence. Royal LePage is a Brookfield Real Estate Services Inc. company, a TSX-listed corporation trading under the symbol TSX:BRE.
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 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.
 Urbanation Inc. report prepared for the Federation of Rental-housing Providers of Ontario, “Ontario Rental Market Study: Measuring the Supply Gap,” September 2017