Canada posted its first nationwide home sales increase in six months as the end of summer vacations and a steadily improving economy boosted the market.
National home sales rose 0.9 per cent in September from the month before, the first monthly increase in transactions since March as benchmark home prices rose 1.7 per cent, according to data released Friday by the Canadian Real Estate Association. Even as sales picked up, however, the amount of new housing supply hitting the market fell 1.6 per cent, putting a slim majority of local markets back into sellers’ territory, according to the report.
“Given we are still stuck at around two months of inventory nationally, the thing to keep a close eye on going forward will be the behavior of prices,” Shaun Cathcart, the real estate board’s senior economist, said in a press release accompanying the report. “While the acceleration in home prices we saw in September was more than most would have expected, the fact that prices are now moving back in that direction is not surprising.”
Though the housing market has cooled since the low interest rates and demand for bigger living space induced by the pandemic drove it to a record-setting frenzy earlier this year, prices have remained elevated and helped make housing affordability an issue across the country. With the relative lull in the market coming to an end, the upward pressure on prices may accelerate again — posing a challenge to Prime Minister Justin Trudeau, who was returned to power in an election last month in part on promises to help first-time buyers…read more.
The Canadian bond market is sending real estate a message — credit is going to tighten. Government of Canada (GoC) 5-year bond yields hit the highest level in a year today. Yields for the segment are now triple the level they were last year. Since GoC bond yields influence mortgage rates, this will drive the cost of a mortgage higher.
Government Of Canada 5-Year Bond Yields And Mortgages
The GoC 5-year bond yield is related to the interest charged on mortgages of similar lengths. Credit markets compete by looking for lenders willing to part with their money. Mortgages are a little less secure than GoC bonds, so they pay higher yields. After all, if they charged the same rate, why wouldn’t you just get a government bond? They need to add a premium, usually somewhere between 15 and 30 basis points. As the 5-year bond yield rises, so does the interest cost for an insured 5-year fixed-rate mortgage.
Rising rates are generally good news, meaning the economy needs less stimulus. Higher financing costs tend to consume more income, and reduce profits though. Therefore it tends to cool demand for goods, which can slow the economy’s growth. This makes it much more difficult for home prices to rise. During the pandemic, the opposite happened, and bond yields dropped like a stone…read more.
In April 2021, TD chief economist Beata Caranci wrote a paper with an interesting title.
It’s called “Canada’s Housing Market and The Big Bang Theory: Occam’s Razor and Schrodinger’s Cat”.
In the paper, Caranci makes a number of observations, and one of these is that real estate has produced higher returns than the stock market over the last 20 years.
“Canadians don’t shy away from housing debt because more and more people see it not just as an ownership opportunity and store of value, but as a path towards wealth creation that carries less volatility than investing in the stock market,” Caranci wrote.
A recent home sale on the East Side of Vancouver is a good example…read more.
The Canadian real estate slowdown is getting started, as another leading indicator fades. Statistics Canada (Stat Can) data shows building permit values fell in August. Since permits are for future activity, a decline means less building is coming. All the declines were due to a drop in residential permits, which has fallen sharply from its peak. While the drop is sharp, there’s no need to worry about supply concerns yet. Even at this reduced volume, the value of permits still exceeds pre-pandemic levels.
Canadian Building Permits Fell 2.1%
Canadian building permits slid lower, but they’re still much higher than last year. The value reached a seasonally adjusted $9.7 billion in August, down 2.1% from the previous month. It’s still 16.9% higher than the same month last year, so not exactly a cratering of activity. Reduced permit values in Ontario (-9.9%) and BC (-7.5%) were the strongest regions contributing to the drop.
The drop in permit values are still fairly small, but there’s a big catch here. Permit values peaked in March 2021, and monthly values have now dropped 4.2% since then. Substantial, but not exactly an earth shattering drop.
Diving a little deeper though, we see construction activity is diverging. Residential buildings made a sharp drop, while non-residential buildings are making up lost ground. These are two district trends completely lost at the macro level…read more.
Canada’s housing agency said the country is now at high risk of a sharp correction in home valuations as the continued appreciation in prices becomes unmoored from economic fundamentals.
The Canada Mortgage and Housing Corp. raised its market risk assessment to high from moderate on Tuesday, in a report showing both activity and prices remain near record levels reached earlier this year amid rock-bottom mortgage rates and a frenzy for bigger living spaces driven by the COVID-19 pandemic.
Though Canada has seen a rising vaccination rate and an improving economy since then, the strength in the housing market is still far beyond what’s warranted by these developments, with prices further detached from labor incomes, the agency said.
“We’re seeing price acceleration, over-valuation, and it’s increasing the vulnerabilities for Canada,” Bob Dugan, CMHC’s chief economist, said on a conference call with reporters. “Hopefully we don’t see a large fall in house prices.”
On top of the shift in the national outlook, the agency raised its risk assessment of Montreal’s housing market to high from moderate, bringing the number of Canada’s major cities deemed most at risk to six. Vancouver was a notable exception, seeing its risk assessment fall to low from moderate on an increase of homes on the market that’s caused price growth to settle down…read more.