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Housing affordability: Recent improvement will not carry into H2 2023
From National Bank of Canada
The second quarter of 2023 saw housing affordability in Canada post a third consecutive improvement. While not as substantial as the previous two betterments, it still marked an advancement for 9 of the 10 markets covered. Taken together, the last three quarters represent a 7.1 percentage point decline for the mortgage payment as a percentage of income (MPPI). While that was a positive development, it pales in light of the 24.6pp worsening in affordability in the two previous years and only brings affordability back to levels last seen a year ago. The MPPI now stands at 59.3%, still way off the average since 2000 of 42.5%. The improvement mostly stemmed from a decrease in home prices. The latter declined 1.2% in the quarter which brings the cumulative decline over the last year to 8.1%. This pullback is the largest observed in a generation but could have bottomed out according to house price index data. The Teranet-National Bank Composite HPI rose 2.2% seasonally adjusted in June, and momentum is expected to continue into the third quarter on the back of strong demographics and a lack of supply in the resale market. Compounding that headwind, after providing marginal respite in Q2 (-3 basis points), mortgage interest rates in July have crept up on the back of further tightening by the Bank of Canada and should be detrimental to affordability in the next report. Moreover, the flip side of restrictive monetary policy is a weakening economic outlook. In such a high interest rate environment, we cannot count on significant wage gains to improve affordability, as we expect the labour market to cool in the second half of the year.
HIGHLIGHTS:
Canadian housing affordability posted a third consecutive improvement in Q223. The mortgage payment on a representative home as a percentage of income (MPPI) declined 1.6 points, a further pullback following the 3.2-point decrease in Q123. Seasonally adjusted home prices decreased 1.2% in Q223 from Q122; the benchmark mortgage rate (5-year term) edged down 3 bps, while median household income rose 1.2%.
Affordability improved in 9 of the ten markets covered in Q2. On a sliding scale of markets from best improvement to deterioration: Toronto, Hamilton, Ottawa-Gatineau, Victoria, Vancouver, Winnipeg, Edmonton, Calgary, Montreal, and Quebec. Countrywide, affordability improved 1.2 pp in the condo portion vs. a 1.8 pp improvement in the non-condo segment.
https://www.nbc.ca/content/dam/bnc/taux-analyses/analyse-eco/logement/housing-affordability.pdf
CREA Updates Resale Housing Market Forecast
The Canadian Real Estate Association (CREA) has updated its forecast for home sales activity and average home prices via Multiple Listing Service (MLS) Systems of Canadian real estate boards and associations for 2023 and 2024.
As expected, national home sales came flying out of the gates in April 2023. Buyers who had been sitting on the fence responded to the twin signals of interest rates looking like they were at a top and property values hitting bottom.
With the Bank of Canada unexpectedly ending its pause on rate hikes in June and hiking again in July, a major source of uncertainty has returned to the housing market.
That said, even before the resumption of rate hikes, the recent sales rally had already shown signs of losing steam. The biggest month-over-month increase in sales activity was back in April, followed by an increase only half as big in May, then by a small 1.5% gain in June. This was likely because new listings had fallen to a 20-year low, which was reflected in month-over-month price gains in April, May, and June that were only bested by those seen during the COVID-19 pandemic.
New listings are now catching up to sales, although this isnt expected to translate into further big gains in activity as some buyers will likely be moving back to the sidelines, as they did in 2022, to wait for additional signals from the Bank of Canada and the data it bases policy on. Looking further out, theres also a growing consensus that rates will not just be higher, but likely for longer well into 2024.
As a result, CREA has downgraded its forecast for home sales in 2023 and 2024 compared to its April 2023 outlook, along with the trajectory for prices. Thats not to say either are necessarily expected to return to declines on a month-to-month basis, but rather to stabilize or rise at a slower pace than they have in recent months.
https://www.crea.ca/housing-market-stats/canadian-housing-market-stats/quarterly-forecasts/
Spectacular jump in house prices in June
Following the recovery of the residential housing market in recent months, the Teranet-National Bank composite HPI jumped 2.2% from May to June, marking the third consecutive monthly increase, but also the largest price rise in a single month since November 2006. After a cumulative decline of 8.7% since peaking in April 2022, recent rises in the composite index have erased part of this correction, which now stands at just 6.2%. This rebound is even more impressive given that 81% of cities covered in June saw an increase during the month, the best diffusion of growth since the composite index peaked last year. While prices could continue to be supported by strong demographic growth and the lack of supply of properties on the market, and continue to rise in the third quarter, the Bank of Canadas recent rate hikes and the economic weakness expected in subsequent quarters will represent a headwind for house prices thereafter.
HIGHLIGHTS:
The Teranet-National Bank Composite National House Price Index rose by 2.2% in June after seasonal adjustment.
After seasonal adjustment, 9 of the 11 markets in the composite index were up during the month: Toronto (+2.9%), Vancouver (+2.6%), Quebec City (+2.6%), Halifax (+2.3%), Calgary (+2.1%), Victoria (+1.9%), Montreal (+1.4%). Ottawa-Gatineau (+1.0%) and Edmonton (+0.2%). Conversely, prices fell in Winnipeg (-0.2%), while remaining stable in Hamilton.
From June 2022 to June 2023, the composite index fell by 5.1%, a smaller contraction than in the previous month. Price growth in Calgary (+6.5%). Quebec City (+5.2%) and Edmonton (+1.3%) was more than offset by declines in Montreal (-3.6%), Victoria (-3.8%), Vancouver (-5.0%). Halifax (-5.6%), Winnipeg (-5.7%). Toronto (-6.7%), Ottawa-Gatineau (-8.4%) and Hamilton (-13.4%).
https://www.nbc.ca/content/dam/bnc/taux-analyses/analyse-eco/logement/economic-news-teranet.pdf
