Date Published: February 11, 2020
2019 marked a year of recovery for Canadian housing markets (Chart 1), after activity was dampened by the implementation of the B-20 guidelines and rising mortgage rates the year prior. Canadian home sales advanced by 6.5%, driven by a sharp recovery in B.C., further gains in Quebec and rising activity in Ontario. To put things in perspective, the tally of 489,000 units sold this past calendar year was above the nation’s 10-year average of 481,000 units though still down from the all-time high of 540,000 sales recorded in 2016. Meanwhile, the combination of increasing home sales and falling resale supply tightened markets, especially in the second half of the year. Accordingly, after falling in 2018, average price growth returned to positive territory, spurred by solid advances in Ontario and Quebec.
Looking ahead to 2020, the drivers supporting last year’s recovery should remain largely in place and manifest across most provinces, resulting in higher sales and prices (Table 1). However, they are unlikely to provide the same thrust to activity as they did in 2019, setting the stage for sales gains to decelerate as the year progresses. Our expectations as to how our forecast drivers will evolve this year are as follows:
|Table 1: Forecasts|
|Home Sales (% Chg.)||Home Prices
|Newfoundland & Labrador||-5.2||9.7||5.6||-1.4||-3.0||-0.4|
|Prince Edward Island||-4.5||-7.4||8.0||4.5||11.6||3.9|
|Source: CREA, CMHC, Statistics Canada, TD Economics. Forecasts by TD Economics as at December 2019.|
With these broad drivers in mind, lets now focus on some of the key developments shaping markets in various regions across the country.
Toronto’s market displayed some interesting dynamics last year. The recovery in sales was driven by the single-detached segment – a first since 2012 (Chart 2). In retrospect, this outperformance is unsurprising, as levels were at multi-year lows the year prior. Given extremely tough affordability conditions within the single-detached market, one might have assumed that less expensive properties drove the sales gain. However, that was not the case as properties priced above the median accounted for most of the growth. This dynamic was probably explained in part by the fact that condo price growth was yet again very strong, providing significant equity, and therefore ability, for buyers to trade-up into these more expensive units. Note that late last year, the gap between the median price of a single-detached home and condo was the narrowest since 2011. And, tighter conditions in the condo market suggests that this gap will be maintained, or could narrow further, in the near-term. This will provide a boost to move-up buying and overall activity.
Beyond this factor, the demographics of the region should support activity, particularly as the population of those aged 25-44 (which captures most first-time homebuyers) has increased sharply in recent years. Meanwhile, survey evidence points to first-time homebuyers tapping family and friends for down payment assistance to a growing extent, which should help them tackle affordability challenges.
While sales in the GTA are set to increase this year, the fact that price growth is heating up is arguably the larger story. Indeed, after a 4% gain in 2019, we are forecasting an acceleration in price growth to 8% this year as rising demand interacts with constrained supply. On the latter point, active listings were lower last year, and new listings also declined, leaving the sales-to-listings ratio well into seller’s territory to close 2019 (Chart 3). Importantly, single-detached prices are now growing positively after a detour in 2018, and growth in the condo segment remains strong.
The outlook for the GTA’s market is not without risks. Affordability is now the poorest it’s been since the frenzied days of 2017. And, while affording a home remains a difficult proposition in the single-detached market, robust price growth in recent years has also eroded condo affordability to a massive extent. Indeed, median condo prices rose 8% in 2019 and are up a staggering 60% since the end of 2015. This makes them a tougher purchase for potential owner-occupants and raises the carrying costs for prospective investors, including through higher maintenance fees and property taxes. These forces could exert even more downward pressure on the condo market than we are anticipating, weighing on overall activity.
Markets remain tight outside of the GTA, with supply-demand balances returning to where they were prior to the implementation of the Fair Housing Plan in 2017. As such, another year of strong price growth is likely in the cards for the province overall.
Vancouver’s market has undergone a sharp recovery since the spring (Chart 4). Low mortgage rates coupled with falling prices has encouraged buyers to come off the sidelines, unlocking significant pent-up demand built up in recent years. As a result, rising sales of single-detached and row housing fueled a 50% surge in activity since April. Notably, gains were stronger for relatively inexpensive properties, suggesting a muted influence from foreign buyers, consistent with government data showing the same result (Chart 5).
Despite surging sales, the level of activity remains relatively low. This suggests further room to run. Accordingly, we are forecasting a strong sales gain this year, supported by much improved affordability. Notably, increased demand should result rising prices this year, building on the positive momentum observed in the second half of 2019. Our forecasted 4% gain in annual average price growth would mark the strongest since 2016.
Major markets outside of the GVA have held up better in recent years. This smaller downside for sales transformed into lesser upside in these markets in 2019. This year should bring much of the same, as the GVA outperforms the province overall in terms of sales growth. However, because the stock of housing in Vancouver is so expensive relative to other jurisdictions in B.C., a sharp gain in GVA sales will cause provincial price growth to be comparatively stronger.
Last year, Alberta’s promising early-year sales uptick dissipated by May, giving way to a flatlining in activity. Sales also declined in the fourth quarter, meaning that markets entered 2020 on the back foot. On the supply side, new listings were sharply lower last year as they fell the most of any province.
However, 2020 should bring somewhat improved fortunes for the Wild Rose Country. For starters, economic growth is forecast to gradually pick up after a tepid 2019 showing, yielding improved job growth. What’s more, population growth is accelerating, with year-on-year growth in the fourth quarter of 2019 the fastest in over 4 years. Gains have been supported by a turnaround in interprovincial migration, which has been positive since mid-2018 (Chart 6). It’s important to note that, despite a projected pickup in activity, the level of sales will remain quite low on an historical basis.
We are also expecting rising sales in Saskatchewan and Manitoba this year, driven by on-going job growth (Chart 7). Attractive affordability conditions will help in the former market while the latter could see a boost from federal policies supporting first-time homebuyers. This is because Manitoba’s stock of housing generally falls below the qualification threshold imbedded in the federal First Time Homebuyers Incentive, the population is comparatively young (suggesting a disproportionate presence of first-time homebuyers), and affordability is still challenging, despite muted price growth in recent years.
As sales rise, this should result in modestly positive price growth in Alberta, with the projected 1% gain the fastest since 2014. Meanwhile, Saskatchewan should also get there, after experiencing dropping prices for the prior 5 years. In Manitoba, tighter conditions will lead to accelerating price growth. In all three cases, appreciations are expected to be relatively modest, and well below the rate of inflation in Alberta and Saskatchewan. That’s because these markets are still dealing with varying levels of excess supply, including for new homes, resales and rental units.
Quebec’s market has been bolstered in recent years by strong economic conditions (Chart 8) and non-resident buying (although the latter is difficult to precisely quantify). In the Atlantic Region, accelerating population growth (Chart 9) in tandem with attractive affordability conditions has provided a tremendous lift to sales in most of the Atlantic Provinces (Newfoundland and Labrador, plagued by weak economic conditions, remains the exception). At the same time, demographic constraints have kept supply growth subdued in Quebec and across most of the Atlantic provinces (see Annex 1). As a result, markets have tightened up significantly, with sales to listings ratios 50% above their long-term averages in Quebec and 30% above in the Atlantic Region (Chart 10). As a result, price growth has heated up in places like Montreal, Halifax and Moncton. Prince Edward Island, meanwhile, saw double digit growth in home prices last year.
In terms of our outlook for 2020, perhaps no other part of the country encapsulates our view on how this year will play out quite like Quebec and the Atlantic Region. On the one hand, moderating job growth in these provinces is likely to pull sales down with it. However, tight supply-demand balances should push prices even higher, further eroding affordability. Newfoundland and Labrador remains the exception to our view on prices, as oversupply will weigh on price growth.
After a year of recovery in 2019, we look for sales and prices to continue rising this year (although gains should ease as the year progresses). This outlook represents a bright spot for the Canadian economy at a time when consumer spending is lagging, elevated uncertainty is restraining business investment, and a soft global backdrop is weighing on exports.
The prospect of a rate cut by Bank of Canada, alongside another year of continued job gains and robust population growth underpins our forecast for rising sales and prices. Additional supportive factors include the fact that past government policies are likely exerting less restraint on markets, while new policies are supportive first-time homebuyers. Of note, our forecast for rising prices would be consistent with the Bank of Canada’s Canadian Survey of Consumer Expectations, where households’ forecasts for future house price growth are the highest they’ve been in 1 ½ years.
On the other hand, growth in resale supply is likely to lag sales yet again this year. This should put downward pressure on sales while having the opposite effect on prices. And, although we account for this factor in our forecast, it’s possible that this restraint has an even larger impact than what we’re anticipating. Another major risk to our forecast includes the possibility that severely eroded affordability puts the brakes on activity in Toronto. All in, it should be reasonably healthy year for Canadian housing markets.
In the resale market, supply growth has been relatively muted for almost a decade (Chart 11). As our economics textbooks tell us, when supply is constrained, prices will react more aggressively to rising demand. Not only that, a low supply of homes available for purchase acts as a restraint to sales, through restricting the choices available to potential home owners.
Since 2011, both new and active listings in the resale market have generally been flat. And, from 2014 onwards, both new and active listings have generally not kept pace with sales growth (the exceptions were 2017 and 2018, where macroprudential measures distorted both demand and supply). This trend is not unique to Canada, with the U.S. also experiencing weakness in listings activity.
So, why has supply underperformed?In our view, there are several potential explanations:
|Movers as a % of Total Home Owners|
|Age Group||15 - 24||25 - 34||35 - 44||45 - 54||55 - 64||65+||Total|
|Source: 2006, 2011, 2016 Census, TD Economics|
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