There has been nothing ‘normal’ or ‘typical’ about the Canadian real estate market since the start of the COVID-19 pandemic (can we label it ‘crazy’?). More recently, the Bank of Canada’s rapid rate increases had a corrective impact on various regional markets throughout the country – in fact, the aggregate decline in property values in Canada currently stands at approximately -10%.
That said, the Government of Canada’s mandate to increase immigration to ~435,000 people per year is a driving macroeconomic force in the real estate sector that likely supports long-term home values.
KEY TAKEAWAYS THIS MONTH:
Recent Price Weakness May Be Plateauing: Across Canada, the average reduction in real estate values since the peak in May 2022 is approximately 10%. However, regional markets are mixed. Calgary (+8%), Edmonton (+2%) and Saskatoon (+2%) have shown resilience, while other markets like Toronto (-12%), Vancouver (-5%) and Victoria (-9%) have lagged. Interestingly enough, recent data suggests prices may be plateauing and even increasing in some markets. We believe this is being driven by a lack of supply and lower sales volumes.
Canadian Average Residential Price and MLS HPI: Jan 2019 - Mar 2023
Canadian Residential and Non-Residential Mortgage Markets: Q1 2019 - Q1 2023
Similar to their commercial loan book, lenders across the nation are tightening their belts when it comes to mortgage underwriting activity. During Q1 2023, there was approximately $12B (+7% Y/Y, +0.7% Q/Q) in residential mortgages underwritten, while there was approximately $10B (+20% Y/Y, +3% Y/Y) in non-residential mortgages underwritten. Although still growing, the declining trend in residential mortgages is likely a result of both a reduction in price (-10% across Canada) and sales volume (-19% compared to pre-Covid). Non-residential mortgage growth has been robust since 2021 but is showing signs of slowing.
During December 2022, the Canadian Prime Rate (currently 6.7%), which measures the interest rate charged to individuals of the highest credit quality, overtook the 1, 3 and 5-year conventional mortgage rate (currently 6.3%, 6.1% and 6.5%, respectively). The last time this phenomenon occurred was leading up to the housing crash in the early 1990 –we will be keeping a close eye on this trend.
Housing Supply Metrics vs. Immigration, Annual
Canadian Building Permits Issued, Quarterly
At a high-level, immigration continues to grow at a CAGR of 8.7%, while the housing supply (starts, under construction and completions) is only growing at a 6.5% CAGR. In the short term, this inequality appears to be continuing with immigration levels, which stood at approximately 437,000 in 2022, far outweighing housing completions, which stood at approximately 220,000 in 2022. There are some early signs/successes to address this inequality. Housing projects under construction grew at a rate of 12% in 2022, while immigration growth remained largely flat –this will likely help normalize housing dynamics in the national market, and we will continue to monitor this trend. Further, building permits issued for residential and non-residential projects reached a cumulative value of $135 million (approximately +6% Y/Y). However, there are two interesting trends to monitor: (1) it appears that issuance of building permits has stalled and (2) building permits for non-residential projects are beginning to outgrow residential projects.
Housing Supply Metrics vs. Immigration, 2022
Building Permits Issued by Province, Quarterly
Regional markets vary across the nation, as reflected in recent price action. At a high-level:
There is no relief in sight for renters –vacancy and turnover rates have declined in 2022, which was paired with a material (7.7%) increase in rental rates across the country. On a regional level, Ontario and BC continue to have historically tight markets as large levels of immigration impact vacancy and turnover, but Alberta is in an interesting state. Currently, Alberta’s vacancy rate has declined to 3.8% (compared to 6.8% during the prior year) while turnover has increased to 29.4% (compared to 28.4% during the prior year). There doesn’t appear to be any particular reason behind this deviation, aside from the fluctuations in migration and immigration to Alberta over the course of 2022 to match the ebbs and flows of the economic cycle. Rental rates have also increased, reflecting an increased cost to sheltering Canadians (+6.1%, 5.0% and 9.9% in Ontario, Alberta and BC, respectively.
Sources: Statistics Canada, Bank of Canada, CREA, Diamond Willow Advisory.
