Canada’s overall housing market assessment has changed to moderate after ten consecutive quarters of being rated highly vulnerable, according to the most recent Canada Mortgage and Housing Corporation (CMHC) Housing Market Assessment (HMA). This improvement is due to overall price acceleration easing.
On a quarterly basis, CMHC issues the HMA to provide Canadians with expert and impartial insight and analysis, based on the best data available in Canada. This report provides a comprehensive view of housing market vulnerabilities and identifies imbalances. It does not identify long-term fundamental affordability challenges.
Results are based on data as of the end of December 2018 (the annual rental apartment vacancy rates are from October 2018) and market intelligence up to the end of March 2019. This national report provides the housing market assessment at the national level and summary assessment results for 15 Census Metropolitan Areas (CMAs). For each of these CMAs, CMHC also issues a local report with more information and analysis.
“After ten quarters, the state of the national housing market has improved to moderate vulnerability. Even though moderate evidence of overvaluation continues for Canada as a whole, there has been improved alignment overall between house prices and housing market fundamentals in 2018 in comparison to the previous year,” said Bob Dugan, Chief Economist, CMHC.
- While house prices in Vancouver, Victoria, Toronto and Hamilton continue to move closer to levels supported by housing market fundamentals such as population, personal disposable income and interest rates, we continue to see a high degree of vulnerability in their overall assessment.
- Vancouver’s evidence of overvaluation has changed from high to moderate and conditions of overheating are easing as well. Home price growth over the past few years significantly outpaced income growth; these imbalances are now unwinding based on continued growth in economic fundamentals and lower resale home prices.
- In Toronto, conditions of overvaluation continue to ease, as house prices are more in line with housing market fundamentals. Market activity continued to cool during the first quarter of 2019, with the sales-to-new listings ratio remaining firmly in balanced market territory and the MLS® average price continuing to decrease.
- Edmonton, Calgary, Saskatoon, Regina and Winnipeg remain at a moderate degree of overall vulnerability as we continue to see evidence of overbuilding in these centres.
- In Edmonton, where the rental market is tightening, the imbalance between supply and demand in the ownership market is widening. As of February 2019, 61% of the total single- and semi-detached inventory in Alberta’s seven largest markets combined were in Edmonton.
- Low degree of overall vulnerability continues for Ottawa, Montréal, Québec City, Moncton, Halifax and St. John’s.
- Evidence of overheating exists in the resale markets of Montréal and Moncton due to tightening in supply and demand. In 2018, Moncton had a record number of sales as its population increased at three times the provincial rate. While demand remains strong, new listings are declining to historic lows.
CMHC defines vulnerability as imbalances in the housing market. Imbalances occur when overbuilding, overvaluation, overheating and price acceleration – or combinations thereof – depart significantly from historical averages.
The HMA takes into account demographic, economic and financial determinants of the housing market such as population, personal disposable income, and interest rates to detect vulnerability. The framework also takes into account recent developments in both resale and residential construction markets.
The HMA was developed on the basis of its ability to detect vulnerable housing market conditions in historical data, such as the house price bubble Toronto experienced in the late 1980s and early 1990s. The ability of the HMA to detect vulnerabilities relies on the assumption that historical relationships between prices and fundamental drivers of housing markets have not changed.
Note 1: Colour codes indicate the degree of market vulnerability. The HMA is a comprehensive framework that considers both the intensity (magnitude) and the persistence of signals of imbalances. Generally, low intensity and persistence are associated with low evidence of vulnerability. As the number of intense and persistent signals increases, the associated degree of vulnerability becomes higher.
Note 2: Overheating and price acceleration are each assessed with a single indicator. Colour scales for these factors vary between green and yellow only. Overvaluation and overbuilding are assessed with multiple indicators. Their colour scales, as well as the colour scale for the overall assessment, change among green, yellow and red to reflect different degrees of imbalances.
To obtain an accurate picture of the overall state of the housing market, it is important to consider multiple data points and lines of evidence. The HMA analytical framework provides a comprehensive and integrated view that relies on a combination of indicators to detect imbalances in housing markets for several metropolitan areas across Canada, and for Canada as a whole.
Specifically, the HMA considers four main factors that may provide an early indication of vulnerability in the housing market: overheating, price acceleration, overvaluation and overbuilding. For each factor, the framework tests for the intensity (magnitude) and the persistence of signals. Generally, a situation in which we detect few signals with low intensity or lack of persistence is associated with a low degree of vulnerability. Conversely, as the number, intensity, and/or persistence of the signals increases, so does the evidence of imbalances in the housing market.
Overheating and price acceleration are each assessed with a single indicator. Colour scales for these factors vary between green and yellow only. Overvaluation and overbuilding are assessed with multiple indicators. Their colour scales, as well as the colour scale for the overall assessment, change among green, yellow and red to reflect different degrees of imbalances.
- Overheating: Sales greatly outpace new listings in the market for existing homes.
- Moderate: Sales-to-new listings ratio lies above the threshold of overheating for at least two quarters over the past three years.
- Low: Otherwise.
- Sustained acceleration in house prices: Fast-rising prices often indicate that expectations of future house-price appreciation may be excessive.
- Moderate: The Augmented Dickey-Fuller (ADF) test statistic stands above the critical threshold for at least one quarter during the past three years.
- Low: Otherwise.
- Overvaluation: House prices are higher than levels supported by personal disposable income, population, interest rates, and other fundamentals.
- High: The average of the gaps obtained from a group of selected models is above the critical threshold for at least two quarters during the past year. The gap measures the distance between the actual price and the price level estimated from fundamental variables of housing markets.
- Moderate: At least one of the selected models exhibits overvaluation.
- Low: Otherwise.
- Overbuilding: Inventory of newly built and unsold housing units and/or rental apartment vacancy rate are significantly above normal levels.
- High: The inventory of newly completed and unsold units is above the threshold for at least two quarters during the past year, while the annual rental apartment vacancy rate is also above the threshold.
- Moderate: Either the inventory of newly completed and unsold units is above the threshold for at least two quarters during the past year or the rental apartment vacancy rate is above the threshold.
- Low: None of the previous conditions is present.
Overall assessment: Assess the degree of market vulnerability considering the combination of multiple factors.
- High: More than one factor of price acceleration, overvaluation or overbuilding exhibits moderate or strong evidence of imbalances.
- Moderate: The rating reflects three scenarios. The first is when the overall assessment is red in the past six quarters. The second is when only one of the factors of overbuilding or overvaluation is assessed red for at least two quarters during the past year. The last is when one factor is showing moderate evidence of imbalances, but another factor lies slightly below the threshold.
- Low: Otherwise.