Canadian Housing Starts - October 11, 2016

Canadian housing starts jumped 20 per cent in September to 220,617 total units at a seasonally adjusted annual rate (SAAR).  The six-month trend in Canadian housing starts moved moderately higher to just under 200,000 units SAAR, above average annual growth in Canadian households. New home construction will likely slow in coming months as the consequences of government's new mortgage regulations ripple through the housing market.

Housing starts in BC surged 40 per cent higher to 47,560 in September and were 79 per cent higher on a year-over-year basis. Single detached starts rose 27 per cent compared to last September while multiple unit starts nearly doubled. Through the first three quarters of the year, BC housing starts are up 39 per cent compared to 2015. 

Looking at census metropolitan areas (CMA) in BC, total starts in the Vancouver CMA were up 110 per cent year-over-year in September, led by triple digit growth in both single and multiple units. In the Victoria CMA, housing starts tripled compared to September 2015 due to strong growth in new multiple unit starts. New home construction in the Kelowna CMA rose 16 per cent on balanced growth between single and multiple unit starts. Housing starts in the Abbotsford-Mission CMA declined 64 per cent compared to last year as multiple unit projects took a breather in September following several strong months of activity. 

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Canadian Building Permits - October 6, 2016

The total value of Canadian building permits jumped 10.4 per cent from July to August, with gains largely due to higher construction intentions in the residential sectors of Ontario and British Columbia. 

After two straight monthly declines, total permit activity in BC was up 15.9 per cent in August, once again surpassing $1 billion in total value. The gains were almost exclusively due to higher construction intentions for multiple family dwellings.  Those gains more than offset a 7.7 per cent monthly decline in non-residential permits. On a year-over-year basis, the dollar value of building permits in the province were up 4.5 per cent. 

Construction intentions were higher in most of BC's four census metropolitan areas (CMA). Permits in the Abbotsford-Mission CMA surged 249 per cent from July to August but were down 7 per cent year-over-year while the Vancouver CMA saw a 15 per cent increase on a monthly basis but a 12 per cent drop year-over-year. In the Kelowna CMA, permits fell 13 per cent from July but were up 67 per cent year-over-year.  In Victoria, construction intentions rose 9.3 per cent on a monthly basis, and were 58.5 per cent higher than in August 2015.

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Millennials Bear Brunt of Fed Policy Changes

Many, if not most, first-time buyers will experience a steep decline in housing affordability on October 17. New rules introduced by the Federal Government will cause the sharpest drop in the purchasing power of low equity home buyers in years. At a time when housing affordability is a critical issue, deliberately chopping millennials’ purchasing power by as much as 20 per cent will only exacerbate a well-known problem.

Under current rules, insured mortgages with variable rates and fixed terms under five years require home buyers to qualify at the five-year benchmark rate. However, if a borrower opts for a five-year or more fixed term, the borrower can qualify at his or her negotiated, discounted rate instead of the higher benchmark rate. This has long been a fixture of the Canadian mortgage market. As of October 17, 2016, ALL home buyers securing a high-ratio mortgage must qualify at the five-year benchmark rate, even if they have negotiated a lower five-year fixed term rate with their lender.

The low interest rate environment has benefited home buyers and sellers for many years, with all but the least credit-worthy borrowers negotiating a contract rate significantly lower than the benchmark rate. Now, even the most credit conscious households face a dramatic reduction in their purchasing power. For example:

• A family with an annual household income of $80,000 and a 5 per cent down payment will see their purchasing power fall from $505,000 to $405,000 (-$100,000). i
• An individual with an annual income of $60,000 and a 5 per cent down payment will experience a reduction of purchasing power from $380,000 to $305,000 (-$75,000).
• A household earning $120,000 per year and a 10 per cent down payment will see a reduction in purchasing power from $803,000 to $651,000 (-$152,000).

We expect this policy to have the following impacts:

1. Housing demand will slow as millennials, other first-time and early move-up buyers are squeezed out of the market.
2. This reduction in demand may cause imbalances and declining prices across some product types in some communities. In addition, new home construction activity will lag along with related employment and economic growth.
3. Pent-up demand will intensify, contributing to another cycle of rapidly rising prices in the future as financially retrenched millennials buy up an undersupplied housing stock.

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Federal Government Changes to Mortgage Insurance Rules - October 3, 2016

The Federal Government announced significant changes to regulations for new-government backed insured mortgages today. Effective October 17, 2016, all insured homebuyers will have to qualify at the posted 5-year qualifying rate.  This is a change from previous policy where only variable rate mortgages and mortgages with terms less than 5-years were subject to a higher qualifying rate.

With this move, the Federal Government has chosen to offset a modest risk to the taxpayer by severely eroding affordability for low equity home buyers, particularly first time home buyers. The qualifying rate is updated weekly and available on the Bank of Canada website. It is currently 4.64 per cent, about 200 basis points higher than the best bank offered rates.

To qualify for mortgage insurance, a homebuyer's debt servicing ratio must be no higher than:

Gross Debt Service - 39 per cent of household income, including mortgage payment, taxes and heating costs.

Total Debt Service - 44 per cent of household income, including mortgage payment, taxes, heating costs and all other debt payments

The announced measure will apply to new mortgage insurance applications received on October 17, 2016 or later. This measure will not apply to mortgage loans where:

before October 3, 2016: a mortgage insurance application was received;

the lender made a legally binding commitment to make the loan;

the borrower entered into a legally binding agreement of purchase and sale for the property against which the loan is secured.

Mortgage loans for which mortgage insurance applications are received after October 2, 2016 and before October 17, 2016 are also not affected by the rule change, provided that the mortgage is funded by March 1, 2017. Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure.
     
The Federal Government is also instituting new eligibility rules for low-ratio (higher than 20% down payment) mortgages backed by government insurance. As of November 30, 2016,  to be eligible for government insurance, new mortgages must meet the following requirements:

A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;

A maximum amortization length of 25 years;

A maximum property purchase price below $1,000,000 at the time the loan is approved;

For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the original amortization schedule;

A minimum credit score of 600 at the time the loan is approved;

A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent at the time the loan is approved, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,

A property that will be owner-occupied.

These new criteria, in particular requiring a maximum purchase price below $1 million, will essentially make the majority of single family homes in Metro-Vancouver ineligible for government issued insurance for low-ratio mortgages. 

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Canadian Monthly GDP (July 2016) - September 30, 2016

The Canadian economy built on momentum from a 0.6 per cent increase in June, expanding a further 0.5 per cent in July. Those increases follow equal size monthly declines in the spring which led to a second quarter contraction of 1.6 per cent, the largest decline since the second quarter of 2009. A recovery of output in the mining and oil and gas extraction sector was the primary driver behind strong growth in July. 

While some downside risks remain, particularly due to highly leveraged Canadian households, we expect Canadian economic growth will rebound sharply in the third and fourth quarter as oil production normalizes and the federal government's uptick in expenditures and tax credits impacts the economy. The Canadian economy is forecast to expand more than 3 per cent in the third quarter of this year before leveling off to an average of 2.5 per cent in the second half into 2017.  

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Canadian Housing Starts - August 9, 2016

Canadian housing starts declined 9 per cent in July to 198,847 total units at a seasonally adjusted annual rate (SAAR) following a jump in construction activity in June.  The six-month trend in Canadian housing starts moved slightly higher to just over 201,000 units, slightly above average annual growth in Canadian households. 

Housing starts in BC also declined, but were still a very robust 41,050 SAAR. On a year-over-year basis, new home construction was up 14 per cent in July due to a 25 per cent jump in single detached starts and an 11 per cent rise in multiple units. Through the first seven months of the year, BC housing starts are up 37 per cent compared to 2015. 

Looking at census metropolitan areas (CMA) in BC, total starts in the Vancouver CMA were down 9 per cent year-over-year in July, dragged down by a 14 per cent decline in multiple unit starts. Single-detached starts in the Vancouver CMA were up 15 per cent. In the Victoria CMA, housing starts continue to climb, more than doubling year-over-year on strong growth in new multiple unit starts. New home construction in the Kelowna CMA rose 9 per cent as a result of 13 per cent growth in multiple unit starts. Housing starts in the Abbotsford-Mission CMA were up 25 per cent year-over-year, as a surge in single unit construction outweighed a decline in multiple units.

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Record BC Home Sale Forecast Despite Vancouver Slowdown: BCREA 2016 Third Quarter Housing Forecast Update

The British Columbia Real Estate Association (BCREA) released its 2016 Third Quarter Housing Forecast Update today.

Multiple Listing Service® (MLS®) residential sales in the province are forecast to climb 10.4 per cent to a record 113,000 units this year, eclipsing the previous record of 106,310 units in 2005. Housing demand is expected to moderate next year, with home sales declining nearly 8 per cent to 104,400 units. However, housing demand is expected to remain well above the ten-year average of 85,000 unit sales.

"The introduction of a 15 per cent tax on foreign national home buyers in Metro Vancouver is expected to accelerate a moderating trend in the market that began earlier in the year," said Cameron Muir, BCREA Chief Economist. "However, other regions of the province are performing above expectations and at the provincial level, largely offsetting Metro Vancouver's deceleration."

The average MLS® residential price in the province is forecast to increase 11 per cent to $706,900 this year and a further 5.2 per cent to $743,700 in 2017.

"While the cyclical nature of housing markets can exact a harsh toll on affordability in the short term, there is some relief for beleaguered home buyers on the horizon, added Muir. Housing starts in the province are expected to reach near record levels this year, and the highest amount since 1993. In Metro Vancouver, a record number of homes are now under construction. "A moderation in housing demand combined with a rising number of both new and resale homes on the market is expected to create more balance and less upward pressure on home prices."

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Housing Market Slows to a Simmer in BC

The British Columbia Real Estate Association (BCREA) reports that 9,900 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in July, down 3.4 per cent from the same month last year. Total sales dollar volume was $6.57 billion in July, up 5.4 per cent compared to the previous year. The average MLS® residential price in the province was up 9.1 per cent year-over-year, to $663,411.

“Housing demand has moderated in many regions of the province, after setting records earlier in the year,” said Cameron Muir, BCREA Chief Economist. “The less frenetic pace of home sales will likely provide a much needed boost to the inventory of homes for sale. The rate of home price appreciation is also expected to slow from the unsustainable level exhibited this spring.“

Year-to-date, BC residential sales dollar volume increased 45.5 per cent to $56.5 billion, when compared with the same period in 2015. Residential unit sales climbed by 25 per cent to 77,261 units, while the average MLS® residential price was up 16.4 per cent to $731,189.

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Tight Market Conditions Prevail Around the Province

The British Columbia Real Estate Association (BCREA) reports that a record 12,906 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in June, up 14.3 per cent from the same month last year. Total sales dollar volume was $8.97 billion in June, up 25.7 per cent compared to the previous year. The average MLS® residential price in the province was up 10 per cent year-over-year, to $694,925.

“Robust housing demand in the Lower Mainland, Vancouver Island and the Okanagan drove sales growth in June,” said Brendon Ogmundson, BCREA Economist. “At the same time, the inventory of homes for sale continues to slide lower, creating very tight market conditions around the province.“

“The supply of resale homes is remarkably low across BC, but particularly so in Victoria and the Fraser Valley,” added Ogmundson. The sales-to-active listings ratio has eclipsed 60 per cent in both Victoria and the Fraser Valley, corresponding to less than two months of supply given current demand.

Year-to-date, BC residential sales dollar volume increased 53.2 per cent to $49.9 billion, when compared with the same period in 2015. Residential unit sales climbed by 30.6 per cent to 67,361 units, while the average MLS® residential price was up 17.3 per cent to $741,150.

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Record Home Sales Creates Wave of New Home Construction

The British Columbia Real Estate Association (BCREA) reports that a record 13,458 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in May, up 32.3 per cent from the same month last year. Home sales last month exceeded April’s record of 12,969 units. Total sales dollar volume was $9.72 billion in May, up 51.1 per cent compared to the previous year. The average MLS® residential price in the province was up 14.2 per cent year-over-year, to $722,146.

“Record housing demand and dwindling inventories are continuing to push home prices higher in most BC regions,” said Cameron Muir, BCREA Chief Economist. “Total active residential listings across the province are nearly 30 per cent lower than twelve months ago.“

“New home construction activity is at a near record pace in the province,” added Muir. In the Metro Vancouver market, a record number of homes are now under construction. “Once the current crop of homes are ready for occupancy there will likely be more selection for home buyers and less upward pressure on home prices."

Year-to-date, BC residential sales dollar volume increased 62 per cent to $41 billion, when compared with the same period in 2015. Residential unit sales climbed by 35.2 per cent to 54,455 units, while the average MLS® residential price was up 19 per cent to $752,105.

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