Canadian housing market activity is slumping in 2018, and negative momentum has coincided with the start of tougher mortgage qualification stress tests. Granted, Q4/17 had marked a high point as buyers hurried to close deals before January 1, and 2018 numbers are comped against an inflated 2017 base. Still, April Unit Sales contracted 2.4% MoM (-22% YTD), slumping to their lowest levels in more than five years. (See upper Chart of the Day). The overheated markets of the Greater Vancouver and Toronto Area (sales -35% YTD) have been hit especially hard by these restrictions. In our view, Canadian housing activity has been slowing down since 2016, hampered by three key factors:
1) The cumulative effect of repeatedly increased mortgage requirements, as well as GTA/GVA taxes on foreign buyers, has been dragging down sales for some time.
2) Rising interest rates have crimped buyers’ purchasing power.
3) High valuation ratios (House Price to Disposable Income, See lower Chart of the Day) meant the market was vulnerable to any slowdown.
Although stories of “overheated Canadian housing” have been around for years, we would emphasize that without a recession causing significant job losses, homeowners are likely to keep paying their mortgage, and housing prices should deflate slowly. For now, the economy remains strong and wage growth is expected to increase momentum, two positive signs for a potential rebound in housing sales later in the year. Moreover, Alberta/Saskatchewan are benefiting from rising commodity prices, and have seen stabilization in their housing markets.