Insufficient Housing Supply Boosted Home Prices Again In August

General Robyn McLean 16 Sep

A current market overview from Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres.

Home Prices Still Rising As Falling Sales Reflect Insufficient Supply
Today the Canadian Real Estate Association (CREA) released statistics showing national existing home sales fell a slight 0.5% nationally from July to August 2021–the fifth consecutive monthly decline. Over the same period, the number of newly listed properties edged up 0.8%, and the MLS Home Price Index rose 0.9% m/m bringing the year-over-year (y/y) rise to 21.3%. Transactions appear to be stabilizing at a more sustainable, but still strong level (see chart below).

Small declines in the GTA and Montreal were offset by gains in the Fraser Valley, Quebec City and Edmonton.

The actual (not seasonally adjusted) number of transactions in August 2021 was down 14% on a year-over-year basis from the record set for that month last August. That said, it was still the second-best month of August in history.

New ListingsThe number of newly listed homes ticked 1.2% higher in August compared to July. As with sales activity, it was a fairly even split between markets that saw declines and gains. New supply declines in the GTA and Ottawa were offset by gains in Vancouver and Montreal among bigger Canadian markets.

With both sales and new listings relatively unchanged in August, the sales-to-new listings ratio remained a tight 72.4% compared to 73.6% in July. The long-term average for the national sales-to-new listings ratio is 54.7%.

Based on a comparison of sales-to-new listings ratio with long-term averages, a small majority of local markets remain in seller’s market territory. The remainder are in balanced territory.

There were 2.2 months of inventory on a national basis at the end of August 2021, down a bit from 2.3 months in July. This is extremely low – still indicative of a strong seller’s market at the national level and most local markets. The long-term average for this measure is more than twice where it stands today. It was also the first time since March that this measure of market balance tightened up.

Home PricesThe Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.9% month-over-month in August 2021. In line with tighter market conditions, this was the first acceleration in month-over-month price growth since February. While the trend of re-accelerating prices was first observed earlier this summer in Ontario, the reversal at the national level in August was less of a regional story and more of a critical mass story. Synchronous trends across the country have been the defining feature of the housing story since COVID-19 first hit, and that still appears to be the case.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 21.3% on a year-over-year basis in August.

Looking across the country, year-over-year price growth is averaging around 20% in B.C., though it is lower in Vancouver, a bit lower in Victoria, and higher in other parts of the province. Year-over-year price gains are in the mid-to-high single digits in Alberta and Saskatchewan, while gains were a little over 10% in Manitoba.

Ontario saw year-over-year price growth still over 20% in August. However, as with B.C. big, medium and smaller city trends, gains are notably lower in the GTA, around the provincial average in Oakville-Milton, Hamilton-Burlington and Ottawa, and considerably higher in most smaller markets in the province.

The opposite is true in Quebec, where Greater Montreal’s year-over-year price growth, at a little over 20%, is almost double that of Quebec City. Price growth is running a little above 30% in New Brunswick (higher in Greater Moncton, a little lower in Fredericton and Saint John), while Newfoundland and Labrador is in the 10% range on a year-over-year basis (a bit lower in St. John’s).

Bottom Line

Local housing markets are cooling off as prospective buyers contend with a dearth of homes for sale. Though increasing vaccination rates have begun to bring a return to normal life in Canada, that’s left the country to contend with one of the developed world’s most severe housing shortages and little prospect of much new supply becoming available soon despite all of the election promises. As net new immigration resumes, this excess demand in housing will mount. The impediments to a rapid rise in housing supply, both for rent and purchase, are primarily in the planning and approvals process at the municipal levels. Federal election promises do not address these issues.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres 

Bank of Canada holds benchmark interest rates steady

General Robyn McLean 8 Sep

A look at today’s Bank of Canada announcement with valuable insight from our friends at First National. 

Bank of Canada holds benchmark interest rates steady

  • Sep 8, 2021
  • First National Financial LP

 The Bank of Canada made its sixth interest rate decision of the year and for the sixth time, left its overnight benchmark rate unchanged at 0.25%. This low rate has been in force since March 2020.  As a result, the Bank Rate stays at 0.5%.

The Bank also made some new comments on the state of the economy at home and abroad as summarized below:

Global economy

  • The economic recovery continued through the second quarter, led by strong US growth
  • While the global economy “had solid momentum heading into the third quarter,” supply chain disruptions are restraining activity in some sectors
  • Rising cases of COVID-19 in many regions pose a risk to the strength of the global recovery

Canadian housing & economic performance

  • The economy is expected to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery
  • However, GDP contracted by about 1% in the second quarter – this performance was weaker than anticipated in the Bank’s July Monetary Policy Report, largely reflecting a contraction in exports, due in part to supply chain disruptions, especially in the auto sector
  • Housing market activity pulled back from recent high levels, largely as expected
  • Employment rebounded through June and July, with “hard-to-distance sectors” hiring as public health restrictions eased
  • “Unevenness” in the labour market is reducing, although considerable slack remains and some groups – particularly low-wage workers – are still disproportionately affected

Canadian inflation

  • CPI inflation remains above 3% as expected, boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks
  • Factors pushing up inflation are expected to be transitory, “but their persistence and magnitude are uncertain and will be monitored closely”
  • Wage increases have been moderate to date, and medium-term inflation expectations remain well-anchored
  • Core measures of inflation have risen, but by less than the Consumer Price Index

Outlook: stimulus continues

The Bank’s Governing Council believes that the Canadian economy still has “considerable” excess capacity, and that the recovery continues to require “extraordinary monetary policy support.”

Therefore, it remains committed to holding its policy interest rate at what the Bank calls the “effective lower bound” until 2% inflation is “sustainably achieved.” In the Bank’s July projection, this happens in the second half of 2022. (Of note, no update on expected timing was offered in today’s announcement.) The Bank’s quantitative easing program continues to reinforce this commitment and results in keeping interest rates low across the yield curve.

Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery. The Bank pledged to continue to provide the “appropriate degree of monetary policy stimulus” to support the recovery and achieve its 2% inflation objective. This stimulus currently includes $2 billion of bond repurchases per week.

A good time to borrow

With the benchmark rate unchanged, and employment rebounding, conditions remain favourable for all types of property financings.

The BoC’s next scheduled policy announcement is October 27, 2021.