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Canadian home prices expected to keep rising this year, outpacing inflation
Poll of property market analysts finds prices expected to rise 5% this year
Authors of the article:
Mumal Rathore and Richa Rebello
The Canadian housing market has showed resilience, helped by record low mortgage rates and massive fiscal spending.
BENGALURU Canadian house prices will continue their upwards march this year, outpacing inflation after hitting record highs in 2020, according to a Reuters poll of property market analysts who said the risk of a COVID-19 resurgence derailing activity was low.
Renewed lockdown restrictions after a second wave of infections hit the country are threatening expectations for a strong recovery after the economy likely posted its biggest GDP drop on record of 5.1 per cent in 2020.
Yet the Canadian housing market showed resilience, helped by record low mortgage rates and massive fiscal spending.
The Jan. 12-29 poll of 15 property market analysts showed house prices would rise 5 per cent on average this year nationally. That was the highest prediction since Reuters began polling for 2021 in February 2019.
Prices were expected to jump 4 per cent further next year compared to 3 per cent forecast in September. Both 2021 and 2022 predictions are significantly higher than inflation expectations.
Historically low interest rates, changing housing needs, high household savings and improving consumer confidence will keep demand (for homes) supercharged, said Robert Hogue, senior economist at RBC.
The main restraining factors will be a lack of supply, waning pandemic-induced market churn, a modest creep-up in interest rates and an erosion of affordability. Call it a 2022 soft landing.
The Bank of Canada was predicted to keep its key interest rate unchanged at near-zero levels until at least 2024, according to a separate Reuters poll.
House prices in Toronto and Vancouver were expected to rise 5.3 per cent and 4.1 per cent this year respectively, up from 2 per cent predicted for both in September.
Apart from easy monetary policy, a desire for more living space and a successful vaccine rollout were identified as the potential drivers of Canadian housing market activity this year, the poll showed.
While prices are set to rise again this year, nine of 14 economists who answered an additional question on whether activity would be faster or slower than in 2020 said it was likely to be slower over the coming year.
But most economists who responded to another question said the risk of a resurgence in COVID-19 cases derailing the housing market this year was low.
Fading income support, expiring mortgage deferrals and rising interest rates would strongly suggest that the housing market will downshift over the course of 2021, said Brendan LaCerda, senior economist at Moodys Analytics.
Housing is at risk, but not from COVID-19.
Affordability remains a concern. When asked to assess house prices on a scale of 1 to 10, where 1 is cheap and 10 is expensive, respondents rated national, Toronto and Vancouver at 7, 8 and 9, respectively.
Lower interest rates have improved affordability despite the increase in prices. However, that only implies homes are cheap conditional on rates. Rising rates in 2021 will strain affordability, said LaCerda.
Home sales plunged as interest rates continued to rise in May
On a seasonally adjusted basis, home sales slumped 8.6% from April to May, bringing the level of sales slightly below its 10-year average for the first time in 24 months. This decline also represents a third consecutive decrease, with sales down a cumulative 23.0% between February and May. The downward trend is now well established in the country as 75% of the markets have seen their number of transactions decrease during the month. We believe this market moderation should continue in the coming months as the tightening of monetary policy should push variable rates higher and make the stress test even more biting for buyers. Indeed, the stress test uses the higher of 5.25% or the contractual interest rate +2%. Until now, only customers opting for a fixed rate had to qualify with a rate of more than 5.25%. With the Bank of Canada policy rate increase expected in July, the qualification for a variable rate will also exceed 5.25%, a development that should cool the market further since over half of new mortgages are at variable rates.
According to CREA, new listings rose 4.5% in May, the first increase in three months. With the reduction in sales and the increase in new properties for sale, the number of months of inventory rose from 2.3 to 2.7 months in May, its highest level since July 2020. Based on the active-listings-to-sales ratio, market conditions loosened in almost every province during the month, but the housing market continued to be tight in the country as a whole. There are now 3 provinces out of 10 in balanced territory; B.C., Saskatchewan, and Alberta (the latter switched this month). The others continued to indicate market conditions favourable to sellers mainly due to lack of supply.
On a year-over-year basis, home sales fell 21.7% compared to the strongest month of May recorded in 2021. For the first five months of 2022, cumulative sales were down 17.8% compared to the same period in 2021.
Housing starts in Canada increased for a second month in a row by 21.SK in May to 287.3K (seasonally adjusted and annualized), the strongest print since November 2021 (at 305.9K). Starts were well above consensus calling for a 255K print in May while building permits remained high on a historical basis and housing supply continues to be tight. As interest rates rise and demand in the resale market declines, we expect housing starts to also moderate in the coming year.
The Teranet-National Bank Composite National House Price Index increased 2.0% in April compared to March and after seasonal adjustment. On a year-over-year basis, home price increased by 18.8% in April. Ten of the 11 markets in the composite index were up during the month, with Edmonton being the exception.
Canada’s Housing Supply Shortages: Estimating what is needed to solve Canada’s housing affordability crisis by 2030
Were in a housing crisis. This report looks at the overall affordability for the entire housing system in Canada. The report has taken steps to estimate how much additional housing supply is required beyond current trends to restore housing affordability by 2030.
CMHC projects that if current rates of new construction continue, the housing stock will increase to close to 19 million housing units by 2030. To restore affordability, CMHC projects Canada will need an additional 3.5 million units.
Two-thirds of the 3.5 million housing unit gap is in Ontario and British Columbia where housing markets are least affordable.
Additional supply would also be needed in Quebec, a province once considered affordable. It has seen a marked decline in affordability over the last few years. Other provinces remain largely affordable for a household with the average level of disposable income. However, challenges remain for low-income households in accessing housing that is affordable across Canada.