canadian housing health check (january 2017)

CANADIAN HOUSING HEALTH CHECK

Contrasting regional risk profiles and trends

Local housing risk indicators continue to paint diverse pictures of vulnerabilities

and risks across Canada; however, there is little indication that any major market fac-

es a potentially destabilizing downturn in the near term.

Nation-wide, recent market developments have been both positive and negative. The

probability that a steep and widespread downturn would take place in Canada’s hous-

ing market in the next 12 months remains low.

Escalating prices in Vancouver and Toronto: Affordability-related vulnerabilities

continue to be major concerns in Vancouver and Toronto. Such vulnerabilities are

now being tempered (somewhat) in Vancouver, however, by rapidly moderating price

increases. On the other hand, Toronto is showing increasing signs of overheating.

Energy sector downturn: Improving trends and prospects for oil prices have been

positive developments for housing risk profiles in oil-producing provinces. Still,

much uncertainty about the pace and extent of the energy sector’s recovery maintains

substantial downside risks for these markets.

Unemployment: Labour market-related risks have been quite stable during most of

2016; however, such risks increased Alberta and Saskatchewan where the jobless rate

continued to rise to decades-high levels.

Housing policy: Ongoing concerns about housing affordability, government exposure

to housing, and stability of hot housing markets and the financial system keep the

odds of further policy intervention elevated.

Tax on foreign buyers in Vancouver: Although the effects likely have yet to be felt

fully, the Vancouver market appears to be adjusting in an orderly fashion to the 15%

tax on home purchased by foreign nationals.

Condo construction boom: The risk of over-building generally has diminished con-

siderably in the past year thanks to declines in unsold inventories across most mar-

kets. Nonetheless, high levels of construction in Vancouver now face cooling de-

mand and slower population growth, which could develop into an overbuilt situation.

Interest rates: While interest rate risks are still contained, the recent run-up in bond

yields and potential for further increases suggest that higher risks might soon emerge.

January 2017

Largest four housing markets

Toronto — Home resales set a new

record high in 2016. Prices continue to

accelerate, with stronger gains regis-

tered in single-detached segments—

which remain in short supply. Poor and

rapidly eroding affordability is a main

source of concern. The likelihood of

policy intervention to address housing

risks in Toronto is increasing.

Montreal — Despite a slow start, home

resales rose solidly for the second-

straight year in 2016—no doubt receiv-

ing support from the region’s impres-

sive employment gains in recent

months. The earlier home inventory

issues continue to evolve constructive-

ly. Montreal’s overall vulnerability

profile is improving.

Vancouver — Extremely poor afforda-

bility is a significant vulnerability. The

market is still adjusting to recent poli-

cy measures to address housing risks.

To date, the market has cooled signifi-

cantly and home prices are coming

under downward pressure; however, a

crash is unlikely given still-solid eco-

nomic underpinnings.

Calgary — A soft economy, surging

unemployment, weakening de-

mographics, and rising condo and rent-

al inventories are major sources of

concerns. Still, a recent drop in condo

construction and a slightly improving

trend for home resales have been posi-

tive developments suggesting that

risks might ease in the period ahead.

Canada Vancouver Calgary Toronto Montreal

Affordability

Resale market balance

Rental market balance

Interest rates

Labour market

Demographics

New home inventory - singles

New home inventory - multiples

Homes under construction - singles

Homes under construction - multiples

Significantly outside historical norms and posing much higher risk than usual

Modestly outside historical norms and posing moderately higher risk than usual

Within historical norms or not posing any immediate threat

Monitoring dashboard

Craig Wright

Chief Economist

(416) 974-7457

[email protected]

Robert Hogue

Senior Economist

416-974-6192

[email protected]

CANADIAN HOUSING HEALTH CHECK | JANUARY 2017

2

Background

Canadian Housing Health Check provides RBC Economics’ assessment of key indicators of Canada’s housing market that are

deemed to offer early warning of potential imbalances. This monitoring exercise is one of the tools used regularly by RBC Econom-

ics to follow developments in this important sector of the Canadian economy. The report focuses on indicators that have been closely

correlated (leading or coincident) with housing downturns and significant home price declines during housing cycles in the past three

decades or so. While we believe that housing affordability and the sales-to-new listings ratio (and months’ inventory) are the best

indicators of market stress and price pressure, respectively, no single indicator provides perfect and accurate early warning signals of

impending trouble. Accordingly, Canadian Housing Health Check emphasizes a ‘dashboard’ approach to convey the point that trou-

ble in the housing market can arise from many directions and that it is imperative to monitor the situation broadly. This approach is

complemented by a detailed review of individual indicators that includes a graphical depiction of the current situation within a his-

torical context and a brief discussion of the rationale of our assessment.

About the graphics and risk ‘zone’ system The dashboard graphics display the current values of the indicators (dark blue bar) within zones that we consider safe (green), con-

cerning (yellow) or dangerous (red). The width of each graphics represents the range of values posted by the indicator during the past

30 years (or period of time available). The far left corresponds to the safest measure ever recorded and the far right, to the most ex-

treme imbalance reached historically. For most indicators, the left corresponds to low values but for some (sales-to-new listings ratio

and net immigration) to high values.

The yellow and red zones appearing in dashboard graphics and individual indicator charts generally were determined by analyzing

past housing downturns and constitute our estimations of thresholds above (or, in some cases, below) which market imbalances and

significant home price declines occurred at the national level in Canada. The yellow zone comprises a range of values that, histori-

cally, have been mostly associated with imbalances but not always with housing downturns (i.e. sustained price declines). In other

words, these values give somewhat ambiguous and sometimes ‘false’ signals. The red zone, however, comprises values that repre-

sent imbalances much more clearly and of larger magnitude. An indicator in the red zone should be considered a source of worry.

The farther to the right in the red zone in the dashboard graphics are the values, the more extreme is the imbalance, the more intense

is the stress exerted on the market and, ultimately, the more severe the potential correction.

The specific rules at the national level are as follows:

RBC Affordability Measure for the aggregate of all housing types: yellow threshold = 41.5% (0.3 standard deviations above

the long-term mean); and red at 45.1% (1.0 standard deviations above the mean).

Sales-to-new listings ratio: yellow threshold = 0.40; and red = 0.35.

Months of inventory: yellow threshold = 7.0; red = 8.5.

Rental vacancy rate: yellow threshold = 3.2% (long-term mean); and red = 3.7% (0.5 standard deviations above the mean).

Real 5-year bond yield relative to trailing 12-month average: yellow threshold = 1.0 percentage point (1 standard deviation

above the mean); red = 2.0 percentage points (2 standard deviations).

Unemployment rate relative to trailing 12-month average: yellow threshold = 0.41 percentage points (0.6 standard deviation

above the mean); red = 0.9 percentage points (1.5 standard deviations).

Net immigration per 1,000 population: yellow threshold = 6.5 (0.5 standard deviations above the mean); red = 5.0 (0.4 stand-

ard deviations below the mean).

Completed and unoccupied units per 1,000 population, singles and semis: yellow threshold = 0.29 (0.3 standard deviations

above the mean); red = 0.36 (1.3 standard deviation above the mean).

Completed and unoccupied units per 1,000 population, multiples: yellow threshold = 0.36 (the mean); red = 0.47 (0.9 stand-

ard deviation above the mean).

Housing under construction per 1,000 population, singles: yellow threshold = 2.11 (0.5 standard deviations from the mean);

red = 2.33 (1 standard deviation from the mean).

Housing under construction per 1,000 population, multiples: yellow threshold = 3.93 (0.5 standard deviations from the

mean); red = 4.58 (1 standard deviation from the mean).

The areas shaded in grey in the indicator charts correspond to housing downturns – i.e., periods during which home prices (as de-

fined as average prices of homes sold on the MLS system) fell by more than 5% from monthly peak to trough. It is important to note

that the precise timing of these downturns can vary depending on the home price measure used. The grey shaded areas, therefore,

should be seen as broad guidelines.


3

CANADA

Affordability

Deteriorating

Existing home market balance

Easing modestly

Fairly stable

Rising slightly

Demand fundamentals

Rising sharply

Fairly stable

Rising sharply

Supply fundamentals

Declining

Declining

Rising slightly

Fairly stable

Six-month trend

RBC affordability measure- aggregate

Low High

Sales-to-new listings ratio

LowHigh

Months of inventory

Low High

Change in real 5-Year bond yields

Low High

Low High

Housing under construction per capita - singles

Low High

YellowHousing under construction per capita - multiples

Low High

Yellow

Rental vacancy rate

Change in the unemployment rate

Low High

Yellow

LowHigh

Yellow

Net immigration rate

Low High

YellowCompleted and unsold units per capita - singles and semis

Low High

YellowCompleted and unosold units

per capita - multiples


4

Affordability

CANADA


20

25

30

35

40

45

50

55

60

65

70

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

RBC affordability measure - aggregate

Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage

Ownership costs as % of household income, Canada

In our view, affordability is the most meaningful indicator of underlying

market stress. Other traditional metrics such price-to-income and price-to-rent ratios can be useful guides of market imbalance under many circumstances;

however in the current environment, affordability is a superior gauge because

it explicitly takes into account interest rates (the other measures don’t), which have been—and, in the near term, expected to remain—abnormally low.

The most recent reading of RBC’s aggregate housing affordability meas-

ure (44.3% in Q3 2016) suggests the presence of greater-than-average

market stress for buyers in Canada with the situation steadily deteriorat-

ing since the spring of 2015. Affordability is most stretched for single-

detached home in Canada’s largest markets. Condo affordability (35.6%)

is generally close to historical norms, which implies little in the way of

undue stress in this category.

We estimate the ‘danger zone’ for the aggregate measure to be above 45.0%

nationally.

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Monthly, S.A.


Source: RBC Economics Research, Canadian Real Estate Association

Monthly, S.A., Canada


Buyer's market

Balanced market

Seller's market

The sales-to-new listings ratio is a reliable gauge of the degree of slack or

tightness in the resale market. When the ratio approaches, or is above 0.60, the market favours sellers and prices typically rise rapidly. When the ratio

approaches, or is below 0.40, the market favours buyers and prices come

under intense downward pressure. Anything in between is considered a bal-anced market and prices tend to rise modestly.

Canada-wide, the sales-to-new listings ratio climbed into seller’s market

territory early in 2016 and was 0.63 in December 2016, down slightly

from a six-year high of 0.65 reached in April and May. Home resales in

Canada have trended downwardly since spring last year, and so have

new listings since late-2015. The majority of markets are considered

balanced with Toronto (a sellers’ market) bucking the trend.

Historically, the largest price declines occurred when the ratio fell below

0.35.

0

1

2

3

4

5

6

7

8

9

10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Long-term average

Monthly, S.A., Canada

Months of inventory


The total number of homes for sale expressed as the number of months it

would take to sell them at the current pace of sales is another resale market balance indicator. Historical correlation with prices is difficult to establish

with precision, however, because the Canadian Real Estate Association has

been publishing this indicator only since 2004.

Nonetheless, based on what track record is available, we estimate that down-

ward pressure on prices start to build at levels between 7.0 and 8.5 months,

and that severe pressure emerges at levels exceeding 8.5.

The slowdown in listings amid still-strong (albeit easing) resales reduced

the number of months’ inventory in Canada to the lowest level (4.5) in

more than six years in the early-fall before rising marginally to end 2016

at 4.6. This level is consistent with continued price increases.

Demand-supply balance indicators for the existing home market, there-

fore, continue to suggest little in the way of any imminent threat to the

stability of the national market.

0

1

2

3

4

5

6

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Long-term average

Rental vacancy rate

Annual:1988-2010; Semi-annual: 2011-currentSource: RBC Economics Research, CMHC

%, total CMAs, purpose-built apartment buildings of three units or more, Canada The rental vacancy rate has not correlated very closely with prices historical-

ly. However, we believe that the Canadian housing story will be very sensi-

tive to the supply of new units into the marketplace, much of which (almost

entirely condos) will be directed toward the rental market. Therefore, this

gauge of market absorption in the rental segment should be monitored close-ly.

A main drawback of the vacancy rate as a monitoring tool is that it is pub-

lished only once a year (in October) by CMHC.

The latest data for October 2016 shows further marginal increase from

3.3% in October 2015 to 3.4% at the national level, which slightly ex-

ceeds the long-term average (3.0%). The rise since 2014 primarily reflect-

ed large increases in Alberta and Saskatchewan.

We would consider a vacancy rate above 3.5% as a sign of oversupply in the

rental space.


5

Demand fundamentals

CANADA

Supply fundamentals

-4

-3

-2

-1

0

1

2

3

4

5

6

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage points, Canada

Real 5-year bond yields relative to trailing 12-month average

Source: RBC Economics Research, Bank of Canada, Statistics Canada

Surges in interest rates have been strongly associated with market downturns

and price declines in several housing cycles in the past 30 years in Canada.

A 100 basis-point rise relative to the trailing 12-month average would apply

intense downward pressure on the market and a 200 basis point surge would likely destabilize it and potentially cause a significant price decline.

The yield on the five-year Government of Canada bond surged in since

early November 2016, although the level remained historical low. The

real yield jumped by 77 basis points above its 12-month trailing average

in November. Any further increases in the coming months could become

materially detrimental to housing demand in Canada.

RBC’s base case interest rate forecast calls for the overnight rate to

remain unchanged through the end of 2017, and for longer-term rates to

continue to rise moderately. This scenario would pose a growing risks to

the housing market in the near term.

-2

-1

1

2

3

4

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage points, Canada

Unemployment rate relative to trailing 12-month average

Source: RBC Economics Research, Statistics Canada

Similarly, spikes of unemployment have been associated with housing down-

turns in the past 30 years, although they have tended to lag price declines rather than lead them.

We estimate that a 0.25 percentage point increase in Canada’s unemployment

rate relative to the trailing 12-month average would stress the market moder-

ately, but that a full percentage-point surge would threaten its stability.

The unemployment rate has been relatively stable throughout 2016 with

a slight downtick recorded late in the year. The rate has been below the

trailing 12-month average since May.

Labour market conditions pose little risk nationally at this point. Such is

not the case everywhere across the country, however. Labour market-

related risks are elevated in oil-producing provinces.

1

2

3

4

5

6

7

8

9

10

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Trailing 4-quarter sum, Canada, per 1,000 population

Net immigration rate


Net immigration into Canada is another indicator that has not correlated

closely with housing downturns or price declines historically; however, given

the boom in condo construction in major Canadian cities, any sign that the

strong inflow of immigrants is slowing would be concerning.

The rate of net immigration in Canada (measured per 1,000 population)

has surged during 2016, after falling between late 2014 and mid-2015.

The latest rate for Q3/16 rose to a multi-decade high of 9.3. This is now very

comfortably above the 6.5 threshold signalling some degree of vulnerability.

The rate is likely to remain elevated in light of the federal government

maintaining a high target (300K) for new permanent residents in the

country in 2017.

0.0

0.1

0.2

0.3

0.4

0.5

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Units per 1,000 population, Canada, n.s.a.

Completed and unsold units - singles and semis

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

A telltale of an overbuilt market is the number of units recently completed but

remaining unsold.

We segment the Canadian market into singles and multiples to identify poten-

tial sources of trouble.

On the single-family homes side, the stock of unsold units has dipped

slightly since the summer of 2016 to 0.20 units per 1,000 population by

November, thereby resuming a downward trend after stabilizing between

mid-2014 and mid-2016, There continues to be no signs of any excess

supply of new single-detached units in Canada at this stage. If fact, the

opposite is the case in several markets where single-detached are in short

supply.

We would consider the situation concerning at 0.29 units and dangerous at

0.36 units.


6

Supply fundamentals

CANADA

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average


Completed and unsold units - multiples


On the multi-unit dwellings side, market absorption has been solid

throughout 2016 amid slower completions compared to 2015 (when a

spike in condo completions in Toronto occurred early in the year). This

helped to draw down the inventory of unsold units in Canada. The rate of

unsold units eased to 0.32 units per 1,000 population in November 2016,

down from a 19-year high of 0.41 units in May 2015.

The latest read of this indicator was slightly below the long-term average

(0.36) and well below the 0.48 threshold that would signal a high degree

of excess.

Overall, the inventory of completed but unsold condos evolved construc-

tively in the past year in Canada, thereby muting oversupply risks.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average


Housing under construction - singles


The object of much concern in recent past has been the number of housing

units under construction in Canada.

We continue to find that little concern of overbuilding is warranted in the

single family home segment, where levels remain well below historical

averages (when measured on a per 1,000 population basis) with the trend

even declining slightly in the past several years, although a slight uptick

appears to have taken place in the late stages of 2016.

In some of Canada’s largest markets, demand for single family homes

significantly outstrips supply.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average


Housing under construction - multiples


On the multiples side, however, there continues to be historically-high

levels of condo units under construction in Canada.

There were 5.8 multi-unit dwellings per 1,000 population under construc-

tion in Q3/16, virtually matching the decades-high reached in 2014.

Strictly speaking, this level is well into the ‘high risk zone’ (4.5 units or

higher); however, in the context of tight demand-supply balances in mar-

kets such as Toronto and, until recently, Vancouver, strong construction

should be seen as being part of the solution to restrain price increases.

Most of the units being built are in the Toronto (33% of total) and Van-

couver (19%) areas.

Strong condo construction in large part reflects structural changes that

arose from policy (e.g. rules limiting urban sprawl) and affordability

(condo apartments are the more affordable housing type) considerations,

and therefore, represents a market share gain over single-family homes.

Nonetheless, the prospects for high levels of condo completions in the

period ahead entail a fair degree of absorption risks.


7

GREATER TORONTO AREA

Affordability

Deteriorating rapidly


Fairly stable

Declining

Declining slightly

Demand fundamentals

Rising sharply

Fairly stable

Steady

Supply fundamentals

Stable

Declining

Rising

Fairly stable

Six-month trend


Low High


Low High


LowHigh

Months of inventory -

OntarioLow High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

YellowCompleted and unsold units per

capita - multiples

Low High


Low High



8

Affordability in the GTA has been on a deteriorating trend since 2012

with the pace of deterioration accelerating since 2015. RBC’s measure is

now in a zone that historically has been associated with a high risk of an

ensuing negative outcome.

Most of the affordability pressure is concentrated in the single-family

home side of the market. Condo affordability, on the other hand, is much

less strained, as the level is only modestly higher than its long-term aver-

age.

Stretched affordability does not appear to be a primary consideration for

GTA homebuyers at this stage. Home resales set a new record high in

2016, although they have retreated somewhat since hitting a peak in

May.

The Toronto-area market would be more sensitive to a substantial rise in

interest rates than most markets in Canada due to its high prices.

Demand-supply conditions remain very tight in the GTA. This is a

sellers’ market. The sales-to-new listings ratio reached a seven-year high

of 0.77 in both September and December 2016, well above the 0.60

threshold marking conditions favouring sellers. Tight market conditions

fuel strong—and still accelerating—price increases, particularly for

detached homes (more than 23% y/y), far exceeding household income

growth.

At this stage, the sales-to-new listings ratio suggests little in the way of

any imminent price declines in the area.

On the contrary, current conditions point toward further acceleration in

price gains in the coming months, thereby further exacerbating the

GTA’s affordability challenges.

Affordability



0

1

2

3

4

5

6

7

8

9

10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Long-term average

Monthly, S.A., Ontario

Months of inventory


Demand-supply tightness is corroborated by very low inventory of homes

for sales (active listings).

Although CREA data is available only at the provincial level, the number

of months’ inventory in Ontario is at its lowest point (1.8 months in De-

cember 2016) since records have been published by the Canadian Real

Estate Association (2003).

Separate data from the Toronto Real Estate Board shows that the num-

ber of months of inventory in the Toronto area was 1.1 in December

2016, down from 1.8 a year earlier and 2.2 at the end of 2014.

Concerns that Toronto’s condo boom would flood the rental market and

cause vacancies to rise have not materialized to date.

The rental vacancy rate in the GTA has remained low in recent years. In

fact, it fell slightly in October 2016 to 1.3% from 1.6% a year earlier.

Toronto Real Estate Board statistics showed that condo rental activity

fell in Q3/16 relative to a year earlier due to a sharp drop in the number

of units listed for rent (down 17%) following very strong growth in 2015

when a spike in condo project completions brought many units onto the

rental market. Average rent continued to rise at a brisk pace (by more

than 8% y/y for a one-bedroom apartment).

So far, there is little evidence that condo investors who rent out their

units have overestimated rental demand.

20

30

40

50

60

70

80

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average



Ownership costs as % of household income, Toronto

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Monthly, S.A.



Monthly, S.A., Toronto


Buyer's market

Balanced market

Seller's market

0

1

2

3

4

5

6

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Long-term average

Rental vacancy rate

Source: RBC Economics Research, CMHC

%, purpose-built apartment buildings of three units or more, Toronto


9

Labour market conditions in the GTA continue to be generally support-

ive for the area’s housing market.

Toronto’s unemployment rate recently fell to its lowest level (6.4% in

July 2016) since the middle of 2008, although it has risen slightly since

then to 6.8% in December.

Labour market-related risks remain low at this point.

Demand fundamentals


Supply fundamentals

-2

-1

1

2

3

4

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage points, Toronto



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Y/Y % change in the 15+ population, Toronto

Adult population growth


Solid demographic fundamentals have long supported GTA’s housing

market.

Those fundamentals improved in 2016, following a period of softening in

2014-2015.

The rate of growth in adult population picked up from 1.6% in mid-2015

to 1.8% most recently, thereby inching closer to GTA’s long-term aver-

age of 1.9%.

A rate below 1.5% would be a source of concern.

GTA home builders are responding to the dearth of single-family homes

in the area, with starts rising 16% in 2016 (from historically low levels in

2015).

This is as a positive development that will help address the tightness issue

in this housing category.

Inventories of newly completed and unsold the single-family continue to

be historically low despite trending slightly higher in the past four years.

There is no indication of overbuilding of single-family homes in the area

at present.

The inventory of recently completed and unsold condo units is no longer

a source of concern in the Toronto area.

Absorption of newly built condos has been brisk in the GTA since late

2015 and stocks of unsold units have come down considerably.

The unabsorbed inventory fell from a 22-year peak of 0.58 units per

1,000 population in May 2015 to 0.20 units in November 2016, which is

within the ‘safe zone’—i.e., below the 0.27 threshold signalling the poten-

tial for mild excess supply.

A surge in condo completions (reflecting several large condo projects

reportedly reaching the ‘completed’ stage) led to a sharp increase in the

number of unsold units in early 2015. Completions have returned to

more normal levels subsequently.

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Units per 1,000 population, Toronto, n.s.a.



0.0

0.2

0.4

0.6

0.8

1.0

1.2

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average





10

Supply fundamentals


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




Single-detached starts picked up in 2016 and boosted the number of such

units currently under construction; however, the increase has not been

excessive as the most recent level equaled the long-term average for the

area when measured in per 1,000 population terms.

The current pace of construction activity therefore do not signal any

impending wave of single-unit supply that might cause trouble for the

market.

Policy to reduce urban sprawl and favour higher density urban develop-

ment contributed to a significant slowdown in single-detached home

construction since the mid-2000s.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




The number of multi-unit dwellings under construction has rebounded

since mid-2015 although it is still down noticeably from the all-time highs

reached in 2014.

The recent rise was attributed to a sharp increase in multi-unit starts in

2015 following two years of decline, although the pace has moderated

over the course of 2016.

Expressed on a per 1,000 population basis, multi-unit construction re-

mains in a high risk zone; however, the potential threat to the market is

tempered by the healthier unsold condo inventory.

The main risk of high levels of construction is that many units could

reach the completed stage at once, thereby flooding the condo resale and/

or rental markets. So far, both of these markets have absorbed the in-

creased supply quite handily.


11

GREATER MONTREAL AREA

Affordability

Deteriorating slightly


Tightening

Declining

steady

Demand fundamentals

Rising sharply

Declining sharply

Fairly stable

Supply fundamentals

Declining slightly

Declining

Stable

Declining slightly

Six-month trend


Low High


Low High


LowHigh


QuebecLow High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

YellowCompleted and unsold units per capita - multiples

Low High


Low High



12

Affordability



Existing home supply expressed as number of months’ inventory shows a

declining trend in Quebec since early 2015, although it remains histori-

cally high at the juncture.

This is consistent with the modest firming in marked conditions in Mon-

treal.

The wave of condo completions in 2014 increased competition for pur-

pose-built apartment buildings, which over time has translated into high-

er rental vacancy rates.

The vacancy rate in the Montreal area rose from 3.4% in October 2014

to 4.0% in October 2015, thereby signalling some mild degree of oversup-

ply in the rental market.

20

25

30

35

40

45

50

55

60

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average



Ownership costs as % of household income, Montreal

Affordability deteriorated slightly in the Montreal area in 2016 after

showing an improving trend in the previous six years. Despite the recent

erosion, affordability does not pose any unusual stress for buyers at this

point.

RBC’s aggregate measure was 40.0% in Q3/16, up 1.7 percentage points

from a year ago but still within the safe range.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Monthly, S.A.



Monthly, S.A., Montreal


Buyer's market

Balanced market

Seller's market

Demand-supply conditions in the Montreal area have been on a gradual-

ly tightening trend since 2014. The sales-to-new listings ratio continued to

drift higher in 2016, ending the year at 0.57, near the highest point in

more than three years.

Despite a slow start to 2016, home resales grew at the solid pace of 6%

for the second-straight year last year. Robust sales activity took place

amid a decline in the number of homes put out for sale each month,

which resulted in a significant drawdown in inventories, especially in the

single-detached segment. Condo inventories—which had been a signifi-

cant issue earlier—also fell modestly, although they remain quite plenti-

ful in the area.

The upward trend in the sales-to-new listings ratio suggests that the rate

of price increases may strengthen in the period ahead, and do not point

to any imminent risk of a sharp decline.

0

2

4

6

8

10

12

14

16

18

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Long-term average

Monthly, S.A., Quebec

Months of inventory


0

1

2

3

4

5

6

7

8

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

long-term average

Rental vacancy rate


%, purpose-built apartment buildings of three units or more, Montreal


13

Montreal’s job market has been very strong in the past several months.

The unemployment fell impressively by 2.0 percentage points in the past

12 months. It stood at 6.7% in December, its lowest level since January

2008.

The drop offered further support for the housing market and therefore

was a significantly positive development from a risk point of view.

Demand fundamentals


Supply fundamentals

Following a two year-long period of easing growth, Montreal’s adult

population has grown at an increasingly faster rate since mid-2015, and

returned to its long-term average of 1.0% most recently.

Overall demographics currently pose little risks for the market.

-2

-1

1

2

3

4

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage points, Montreal



0.0

0.4

0.8

1.2

1.6

2.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Y/Y % change in the 15+ population, Montreal



0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Units per 1,000 population, Montreal, n.s.a.



There continues to be very few newly completed single-family homes that

are unsold in the Montreal area.

We see no evidence of an overbuild in this market segment.

0.0

0.4

0.8

1.2

1.6

2.0

2.4

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




On the multi-unit dwelling side, conditions improved noticeably since

2015 with the stock of unabsorbed units declining markedly. The stock

fell from 0.91 units per 1,000 population in August 2015 to 0.69 units by

November 2016—matching the long-term average.

This suggests that the earlier surplus of multi-unit dwellings has been

largely resolved in the Montreal market.


14

Supply fundamentals


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




The risk of any overbuilding of single-family homes in the short term is

extremely remote.

Current levels of units under construction are significantly below long-

run averages and well within the ‘safe zone’.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




A sharp increase in completed units in purpose-built apartment buildings

reduced the number multi-unit dwellings under construction in Montre-

al.

In per 1,000 population terms, that number fell from an all-time high of

5.8 units in January 2016 to 5.2 units in November. Nonetheless the level

remains historically elevated and still poses a potential risk of overbuild-

ing.

Strong condo construction activity in the past decade partly reflected a

structural shift toward multiples supported by urban development policy

and affordability advantage relative to single-family homes.


15

GREATER VANCOUVER AREA

Affordability

Deteriorating sharply


Easing rapidly

Rising slightly

Declining slightly

Demand fundamentals

Rising sharply

Declining

Moderating

Supply fundamentals

Rising

Declining

Rising

Rising rapidly

Six-month trend


Low High


Low High


LowHigh

Months of inventory - BC

Low High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

Completed and unsold units per

capita - multiples

Low High


Low High

Housing under construction per capita - multiples


16

Affordability



Some easing in the market tightness is also visible at the provincial level

where the inventory of homes available for sale measured in number of

months of sale has risen slightly since mid-2016; yet, the inventory re-

mains historically low.

This indicator still suggests the presence of upward price pressure in the

province—which increasingly reflects developments in other parts of the

province such as the Fraser Valley and Victoria.

While clear signs have emerged that demand-supply conditions are eas-

ing in the home ownership market, conditions remain very tight in Van-

couver’s rental market.

The area’s rental vacancy rate continued to decline in 2016, reaching a

eight-year low of 0.7% in October. This is one of the lowest vacancy rates

in Canada.

Vancouver’s rental market, therefore, shows no evidence of any looming

surplus that would cause concerns for the home ownership market.

20

30

40

50

60

70

80

90

100

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average



Ownership costs as % of household income, Vancouver

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Monthly, S.A.



Monthly, S.A., Vancouver


Buyer's market

Balanced market

Seller's market

Extremely poor housing affordability continues to pose a major risk for

the Vancouver-area market. Surging prices further crushed affordability

through most of 2016, although recent signs of cooling in the market

provide some scope for modest improvement in the near term.

Affordability stress is found in both single-family and condo apartment

categories; however, it is far more intense in the former.

At 92.0% in Q3 2016, RBC’s aggregate affordability measure for the

area was the worst level on record.

Poor affordability is likely among the factors that have contributed to

nine-straight months of moderation in home resales in the area since a

peak was reached in the winter of 2016. Policy changes—including the

surprise implementation of a new tax on purchases made by foreign

buyers in August—also likely contributed.

Demand-supply conditions in the Vancouver area sharply re-balanced in

recent months, after heavily favouring sellers for nearly two years.

The sales-to-new listings ratio plummeted from an incredibly tight 0.89

in January 2016 to 0.56 in August (a level consistent with a balanced

market) before rebounding in December to 0.66 in December.

However, the speed with which sellers lost their grip on the market, in

combination with policy moves to cool the market down, has dimmed

price expectations and resulted in month-over-month price declines since

September, mostly in the single-detached segment.

Downward pressure on prices is likely to dominate in the near term de-

spite recent indications that foreign buyers are returning gradually to the

area after moving to the sidelines in the months following the introduc-

tion of the foreign buyer tax.

0

2

4

6

8

10

12

14

16

18

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Long-term average

Monthly, S.A., British Columbia

Months of inventory


0

1

2

3

4

5

6

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Long-term average

Rental vacancy rate

Source: RBC Economics Research, CMHC

%, purpose-built apartment buildings of three units or more, Vancouver


17

The job situation in Vancouver has been very positive in 2016 with em-

ployment up by an impressive 4.7% and the jobless rate averaging 5.5%

in the year, the lowest annual mark since 2008 in the area. The unem-

ployment rate ended 2016 at 5.1% compared to 5.7% at the end of 2015.

Labour market developments do not pose any immediate threat to the

housing market. On the contrary, they offer substantial support current-

ly.

Demand fundamentals


Supply fundamentals

Adult population growth has slowed during 2016 to 1.4% y/y in Decem-

ber 2016 from 1.9% at the start of the year. The rate of growth has

dipped marginally below the threshold (1.5%) signaling the presence of

elevated risks.

Any sustained period of slower-than-usual growth in population could

cause some issues for the high levels of housing construction in the area.

-2

-1

1

2

3

4

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage points, Vancouver



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Y/Y % change in the 15+ population, Vancouver



0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Units per 1,000 population, Vancouver, n.s.a.



Absorption of single-detached and semi-detached has been quite vigorous

since early 2014 and this continued to be the case in 2016. As a result, the

number of recently completed and unsold units has fallen steadily to 0.31

units per 1,000 population in May 2016, before edging up higher to 0.42

units by November—still well into the ‘safe zone’ and below the long-

range average of 0.60 units.

With singles and semi-detached completions remaining on a fairly stable

trend, the Vancouver-area market shows few signs of being overbuilt at

this point.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




Similarly, the situation on the multi-unit dwelling side of the market

remains safe.

The number of completed and unsold units has trended lower since early

2014, reaching a nine-year low in August 2016 and staying flat since then.

Moderate levels of apartment completions in 2014 and 2015 limited the

flow of new supply into the market, and declining completions over the

latter half of 2016 reinforced this trend in recent months.

The Vancouver condo market does not appear to be overbuilt at this

point.


18

Supply fundamentals


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




Builders’ response to the shortage of single-family homes in the Vancou-

ver area became more vigorous in 2016 with starts rising by 12% from

2015. The sharp slowing in resale activity for single-detached homes

during the latter half of the year elicited a concomitant retrenchment in

single-detached starts in the fourth quarter (down 3.2% y/y). Nonethe-

less, strong starts prior to that point drove the number of units under

construction its highest level in nearly 22 years in September before eas-

ing marginally since then.

On its own, the rising number of single-family homes under construction

suggest an increasing risk of oversupply in the period ahead; however,

low inventories of unsold single-detached homes helps to mitigate that

risk.

Fueled by very strong housing starts in 2016, the number of multi-family

units under construction (on a per 1000 population basis) rose to a new

record level, thereby signaling a greater-than-usual risk of imbalance in

this market segment.

Such risk is tempered by the still-tight market conditions in the resale

market and low inventories of newly built and unsold units.


19

CALGARY AREA

Affordability

Stable


Fairly stable

Rising

Rising rapidly

Demand fundamentals

Rising sharply

Rising

Slowing

Supply fundamentals

Stable

Rising rapidly

Stable

Declining rapidly

Six-month trend


Low High


Low High


LowHigh


AlbertaLow High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

Completed and unsold units per capita - multiples

Low High


Low High



20

Affordability

CALGARY AREA


The overall inventory of homes for sale in Alberta still indicates plentiful

options for buyers in the province, although there has been some modest

drawdown since the start of 2016. The number of months’ inventory was

5.7 in December, down from cyclical high of 7.0 in February but still well

above the 4.4 long-run average.

The Calgary Real Estate Board reported that active listings in the area

were down by 13% in December relative to a year earlier; however, the

average number of days it took a property to sell rose to 55 from 49 over

the same interval.

High levels of inventory are consistent with downward pressure on prices

persisting in the short term, albeit at a diminishing intensity.

The recent drawdown in active inventory has eased downside risks for

prices in the area.

Calgary’s rental market appears to be over-supplied.

The rental vacancy rate surged to a record high of 7.0% in October 2016,

up from 5.3% in October 2015 and just 1.4% the year before that.

Such elevated vacancy rate raises significant downside risks for rent

values in the area and revenue prospects for condo investors.

Indeed, CMHC figures show that average apartment rent fell between

2.2% and 6.4% in 2016 depending on the size of the unit.

20

30

40

50

60

70

80

90

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average



Ownership costs as % of household income, Calgary

Housing affordability is a generally constructive factor for the Calgary-

area market, remaining quite stable in past year (in the range of 33%-

34% for RBC’s aggregate measure).

In the current difficult context—with the downturn in the energy sector

and surging unemployment sapping confidence for both buyers and

sellers—the good affordability standing reduces the risk of a significant

price decline.

Calgary faces many tough issues; however, there is no evidence to suggest

that affordability is one of them.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Monthly, S.A.



Monthly, S.A., Calgary


Buyer's market

Balanced market

Seller's market

After weakening considerably in 2015, demand-supply conditions im-

proved somewhat in 2016 on the back of a slight recovery in home resales

since the spring (from a historically low base) and significant reduction

in new listings.

The sales-to-new listings ratio—which rose from 0.41 at the end of 2015

to 0.67 in December—would suggest that the Calgary market is favoura-

ble to sellers; however, there continues to be a hefty inventory of active

listings (4.0 months’ worth of supply according to the Calgary Real Es-

tate Board).

Despite showing signs of stabilizing recently, housing demand remains

soft in Calgary. Home resales fell by 6.1% in 2016 on the heels of a 29%

plummet in 2015.

0

2

4

6

8

10

12

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Long-term average

Monthly, S.A., Alberta

Months of inventory


0

1

2

3

4

5

6

7

8

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Long-term average

Rental vacancy rate


%, purpose-built apartment buildings of three units or more, Calgary


21

Calgary’s labour market continues to be significantly challenged. The

area’s jobless rate reached a decades-high of 10.3% in November and

ended 2016 at 10.2%.

The speed with which labour market conditions have deteriorated still

poses significant risks for the housing market.

The good news is that area employment has picked up since summer

thanks to gains in service industries.

Demand fundamentals

CALGARY AREA

Supply fundamentals

The past deterioration in job prospects contributed significantly to a

slowdown in Calgary’s adult population growth—from a recent cyclical

high of 4.0% in early 2014 to a 23-year low of 1.6% in December 2016.

Calgary’s 2016 Civic Census showed a net migration loss in the 12

months ending April 2016 for only the second time in the past quarter

century. Given the area’s current economic predicament, further losses

can be expected in the near term.

Demographics-related risks are rising rapidly in the Calgary area.

-2

-1

1

2

3

4

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage points, Calgary



0.0

1.0

2.0

3.0

4.0

5.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Y/Y % change in the 15+ population, Calgary



0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Units per 1,000 population, Calgary, n.s.a.



There are few signs of overbuilding of single-detached homes in Calgary.

The number of unsold single-detached and semi-detached has trended

lower after 2000 and stabilized at historically low levels since early 2015

(on a per 1000 population basis).

Despite the turbulence in the resale market, stability of the unsold inven-

tory is being achieved by drastic curtailment of new single-family home

construction. Single-family home starts plummeted by 36% in 2015 and

again by 16% in 2016.

Such builder restraint substantially minimizes overbuilding risks in this

category.

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




The situation is quite different in the multi-unit segment where the num-

ber of unabsorbed units has surged since the spring of 2015 (when Calga-

ry arguably had a supply shortage) to record-high levels by late-2016.

The stock of unsold units was driven higher by sharp increases in condo

apartment completions (up by 39% in 2015 and 40% in the first 11

months of 2016) at a time when demand turned cold.

The completed and unsold inventory rocketed passed the long-term aver-

age (on a per 1000 population basis) for the area and deep into the high

risk zone. There is strong evidence of surplus in this segment of the mar-

ket in Calgary, which may threaten the stability of the market.


22

Supply fundamentals

CALGARY AREA

0

1

2

3

4

5

6

7

8

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




The dramatic scaling back of single-detached home starts contributed to

a steady decline in the number of units under construction since 2015 to

historically low levels.

Such subdued levels of construction pose minimal risks of destabilizing

the market.

0

2

4

6

8

10

12

14

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




After reaching very high levels in 2014 and 2015, there has been a sharp

drop in the number of units under construction moderation on the multi-

unit side in 2016. Much of the wave of condo starts in 2014 has now exit-

ed the construction ‘pipeline’.

Current levels therefore signal a return to a more subdued pace of condo

completions in the period ahead, which is good news considering the

state of oversupply at present in this segment of the market.

Sharp drops in condo apartment starts in 2015 (down 15%) and 2016

(down 42% in the first 11 months of the year) suggest that further mod-

eration is likely ahead.

The material contained in this report is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, without express authoriza-tion of the copyright holder in writing. The statements and statistics contained herein have been prepared by RBC Economics Research based on information from

sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This publication is for the infor-

mation of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

®Registered trademark of Royal Bank of Canada.

©Royal Bank of Canada.

canadian housing health check (january 2017)

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