CMHC Assessment Points to Potential Impact of Home Price Growth in Vancouver and Toronto on Canadian Market

OTTAWA, July 27, 2016 – Evidence of problematic conditions in Canada’s housing market as a whole has increased from weak to moderate since the last report, according to the latest Housing Market Assessment (HMA) released today by the Canada Mortgage and Housing Corporation (CMHC). ). In Vancouver, we now have sufficient evidence to raise our overall assessment of problematic conditions in the Vancouver housing market to high.

The HMA serves as an early warning system, alerting Canadians to areas of concern developing in our housing markets so that they may take action in a way that promotes market stability.

Report Highlights

• Overvaluation and overbuilding remain the most prevalent problematic conditions observed across the 15 centres covered by the HMA.
• Overvaluation is detected in 9 centres while overbuilding is detected in 7.
• Overall evidence of problematic conditions has increased since the previous assessment nationally as well as in Vancouver.
• Strong evidence of problematic conditions is seen in Vancouver, Toronto, Calgary, Saskatoon and Regina. In Toronto and Vancouver, this is due to the combination of price acceleration and overvaluation. In Calgary, Saskatoon and Regina, this is due to the combination of overvaluation and overbuilding.
• Moderate evidence of problematic conditions is seen nationally as well as in Edmonton, Winnipeg, Hamilton, Montreal, and Quebec.
• Evidence of overvaluation has increased since the previous assessment nationally and in Hamilton.
• Overall evidence of problematic conditions has decreased in Ottawa since the previous assessment.

CMHC defines evidence of problematic conditions as imbalances in the housing market. Imbalances occur when overbuilding, overvaluation, overheating and price acceleration, or combinations thereof depart significantly from historical averages. For examples, please consult the Overview section of the national report.

The complete HMA, including national, regional and CMA insight and analysis, is available on ourwebsite.

“For Canada overall, we now detect strong evidence of overvaluation. As a result, our overall assessment has moved from weak to moderate since the last report. Moreover, the greater range of evidence of problematic conditions in Vancouver has led us to conclude that there is now strong evidence of problematic conditions in our overall assessment of the Vancouver housing market.”

— Bob Dugan, Chief Economist, Canada Mortgage and Housing Corporation

“Right now we're seeing moderate evidence of overheating and price acceleration in Vancouver because supply is not keeping pace with demand. We're also continuing to see strong evidence of overvaluation mainly because single detached home prices are higher than those supported by economic fundamentals.”

— Robyn Adamache, Principal Market Analyst (Vancouver), Canada Mortgage and Housing Corporation

Information on This Release:

Jonathan Rotondo
Media Relations
613-748-2734
jrotondo@cmhc.ca

Teranet and Months of Inventory Update Through June 2016

Long-time readers will remember the scatterplots this blog produced outlining the correlation between house price index changes and months of inventory. When mohican first investigated and quantified the correlation it was 2007 and even with only three years of data a decent relationship was shown. We now have about 11 years of data and the relationship has held up very well under a broad range of market conditions.

The methodology is to take two datasets, the ratio of for-sale month-end inventory and monthly sales (i.e. Months of Inventory or MOI) as published by the Real Estate Board of Greater Vancouver (REBGV), and the Teranet House Price Index, then cross-correlate them with a small amount of averaging.

I present two scatterplots here, the first being year-over-year change in prices plotted against months of inventory. Prices are lagged by six months to maximize correlation.
 
The second graph turns out to have highest correlation, relating six month price changes to months of inventory with a three month lag. It is amazing, even after the most recent strong sales activity in Vancouver that this relationship has held so well!


This correlation is what I have recently been calling the "mechanics" of the market.

The first question is surrounding causality: are MOI and price changes coincidental or does one cause another? The short answer: MOI level most likely causes price changes.

(Months of Inventory is close to a real-time dataset -- it is reported quickly a couple of days after month-end. The Teranet HPI reports based on closed sales that are delayed by some months after prices are negotiated. Not surprisingly MOI leads the delayed reporting of the HPI inputs. MOI as I report here has a 1.5 month group delay (3 month moving average), and based on conversations with several real estate agents a typical closing time is 2-3 months. Taking all this into account, MOI does indeed lead price changes, and this matches the intuition: less supply available means more competition between buyers and prices will be "bid up".)

An interesting ancillary observation here is that the dearth of inventory has been almost exclusively due to high sales volumes and not low listing levels. Homeowners have been, at least recently, slow to change behaviour in the face of significant price changes. In addition there is an inherent and unavoidable lag between construction starts and completions (about two years for multi-units, just over a year for single detached). The amount of supply has therefore been broadly fixed and has not kept pace with the sudden change in demand. The result is that MOI has fallen to unprecedented lows and prices have shot up.

Whatever the reasons for the heightened demand (theories and conspiracies abound!), high sales and low inventory has caused prices to go up. But where do we go from here?

Current MOI is around 2. Say for argument's sake we want to "soft land" the market and return price changes to around 5% per year (never mind correcting). Sales would need to stay below new listings such that MOI can climb back to an year-round average around 5. That is a significant move from the current situation and would necessarily mean significant new listing growth, falling sales, or both, just to get things to "soft land". In other words, even a soft landing will require a significant sales/listings transient to hit the market.

The danger with a bout of significant price growth is that it takes a ton of fuel just to level things out, and there is a greater risk of overshooting on the downside. Even absent an overshoot we can expect some stomach-churning along the way. Luckily we all know what overshooting looks like so it shouldn't be a surprise to anyone if that happens.

REBGV Real Estate Activity Through June 2016

REBGV released its sales and listings data for June 2016.

Here are monthly sales, for-sale inventory at the end of the month, and the ratio of inventory to sales (Months of Inventory or MOI) going back to 2005. Sales went plaid this spring. Now it appears there is a chance the orgy of activity has, at least temporarily, returned to within control limits.




New listings have been highish but not compared to all past years. For those who are claiming that higher prices will start effecting people to list, and that we are starting to see that now (cuz ECON 101), it appears that the effect, if present, is not as pronounced as having a good old-fashioned recession.


The ratio of sales to new listings is high and this has meant inventory has remained very low.


Low months of inventory will lead to higher price increases. MOI is now below 2 (that's low). Key point: returning the market to "normal" in terms of house price appreciation (prices rising at a bit above inflation) will require a lower-than-average sell-newlist ratio for many months. It is not enough to return sell-newlist to the average; it needs to drop further. The mechanics of getting to "normal" should not be ignored. We are far from "normal" right now.