housing market

Housing market more vulnerable to downturn

Thursday, September 30, 2021

Canada’s housing market has reaching a new vulnerability high as homes prices accelerate alongside ongoing overvaluation.

High vulnerability at the national level is largely a reflection of problematic conditions in several local housing markets across Ontario and Eastern Canada, according to the latest Housing Market Assessment released by Canada Mortgage and Housing Corporation (CMHC).

A high degree of vulnerability means the housing market is more vulnerable to a potential downturn, with greater consequences if the downturn were to happen.

Historically low interest rates, government supports, and the rollout of mass vaccination programs provided higher purchasing power, disposable income levels, and employment amongst Canadians in the first half of 2021, however, recent home price growth was not fully explained by these improving housing market fundamentals.

“Exceptionally strong demand and home price appreciation through the course of the pandemic may have contributed to increased expectations of continued price growth for homebuyers in several local housing markets across Ontario and Eastern Canada,” said Bob Dugan, CMHC’s chief economist. “This, in turn, may have caused more buyers to enter the market than was warranted.”

The number of home sales in Canada reached a historic high in the first quarter of 2021, with demand far outpacing the supply of available homes. Sales moderated in the second quarter of 2021, albeit to a still historically elevated level, with market overheating still detected at the national level.

There is low evidence of excess inventories in the national housing market. This means there is not an unusually high level of vacant, newly built, and unsold housing units. As well, the rental apartment vacancy rate is not significantly above normal levels.

Regional Outlook

The degree of vulnerability in Montreal is moving from moderate to high, as home prices have risen sharply and are well above the level warranted by fundamentals, such as labour income. There are signs of overheating despite a declining pace of sales and more properties for sale during the second quarter of 2021.

The Greater Toronto Area remained at a high degree of market vulnerability. Despite existing home sales starting to ease and the pandemic-induced buying activity dissipating during the second quarter of 2021, the demand-supply imbalance in the Toronto market for existing homes contributed to the persistence of price acceleration.

Vancouver’s rating was reduced from a moderate to low degree of vulnerability. Price growth has settled down in Vancouver as sales slow down. Homeowners have listed their homes in larger numbers than usual, easing the competition among buyers. Record low listings have kept Victoria as a sellers’ market.

Overheating, price acceleration and overvaluation are all currently prevalent in the Hamilton housing market. In Ottawa, home sales have trended down since April 2021, but sellers’ market conditions still prevail as listings remains at historic lows, pressuring price growth.

The Halifax housing market remains overheated, with the high sales activity against limited housing supply putting upwards pressure on home prices. In Moncton, prices have continued to grow in 2021 (23 per cent year-to-date) reflecting the underlying disconnect between the supply and demand for housing.

In Calgary, market trends are pointing to a strong sellers’ market, although overheating is not detected. In Edmonton, the pace of new home sales remains strong but moderate evidence of excess inventories persists.

Regions showing a low degree of vulnerability include: Saskatoon; Regina; Winnipeg; and Quebec.

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