House prices in the three hottest cities in Canada – Calgary, Toronto, and Vancouver – are rising faster than family income, further straining affordability, says one of the country’s top economists.
Sal Guatieri, senior economist with BMO Bank of Montreal, said “the continued rapid price gains in these cities will increase their vulnerability to a shock—whether economic, interest rate, or otherwise.”
According to the BMO Fall Home Buying Report, released on Monday, 58 per cent of Calgarians and 65 per cent of Albertans, said increased interest rates of two percentage points would strain affordability for them. Nationally, 67 per cent of Canadians felt that way while 66 per cent in the Toronto area and 74 per cent in the Vancouver area concurred.
According to the Calgary Real Estate Board, year-to-date to October 19, there were 21,957 MLS sales in Calgary, up 10.55 per cent from the same period a year ago. The median price of $427,500 has increased by 6.88 per cent while the average MLS sale price of $483,717 has risen by 5.87 per cent.
“Gauging the stability of your mortgage by stress-testing it against a higher interest rate is key to making a responsible and informed home buying decision,” said Laura Parsons, mortgage expert with BMO Bank of Montreal. “Many buyers, especially in larger cities, need to evaluate different circumstances, and the likelihood of being able to afford their purchase long term.”
BMO said the effect of a rise in interest rates is more pronounced in Vancouver, where 22 per cent of potential buyers would be forced to leave the housing market – nearly twice the national percentage. However, buyers in Calgary would feel the pinch the least, with nine per cent cancelling their home-buying plans as a result of rising rates, said the report.
Population growth continues to push housing demand in the Calgary region.
A report released Tuesday by Ben Myers, senior vice-president of market research and analytics with Fortress Real Developments, described the city’s new housing market as “red hot.”
It said there were 9,294 housing starts in the first half of this year, an increase of 67 per cent over the first six months of 2013, and more than year-end totals for 2009, 2010 and 2011.
“The average forecast is calling for 16,400 starts in the Calgary CMA for 2014, which would represent an increase over 2013 (12,600) and the 10-year average of 12,000,” said the report.
“The market may be overshooting slightly, as based on population and employment data, the Calgary CMA may only be able to support approximately 15,100 units in 2014. However, TD Economics noted in July that Calgary remains one of the few cities that is undersupplied.”
The report said Calgary prices have increased between three per cent and six per cent depending on the housing index from the end of 2013. The metropolitan area has appreciated at an average annual rate of approximately seven per cent to nine per cent over the past decade, notwithstanding the highly fluctuating market values in-between, it noted.
“Calgary may have room to grow comfortably, as the average condominium owner has an annual income over $90,000, and the average non-condominium owner has an average annual income over $130,000, both are the highest among the major metros in Canada,” said the report.
It said there were just 490 completed and unabsorbed new housing units in the Calgary census metropolitan area at the end of June, well below the 10-year average of approximately 850 units.
“Just nine completed condominium apartments were unabsorbed in the entire Calgary CMA at the half way mark of the year, less than five per cent of the long-run average of 200 unabsorbed units,” said the report.
“There were 2,225 new condominium sales in the first half of 2014, an increase of 14.7 per cent over the first six months of 2013. The multi-family market in Calgary is expected to perform inline with 2013, and is supported by declining new and resale inventories and rising prices, which has resulted in the new concrete high-rise developments downtown launching at $600 per square feet or more this year.”
Canada may need tougher rules to slow gains in the housing market, the International Monetary Fund said.
“High household debt and a still-overvalued housing market remain important domestic vulnerabilities,” the Washington- based group said Tuesday in its World Economic Outlook. Those risks “call for continued vigilance and may require additional macro-prudential measures.”
The report said that house prices are 10% above “fundamental values,” and “housing market risks should continue to be closely monitored.”
Finance Minister Joe Oliver said last week he doesn’t see a housing bubble in Canada, adding that past rule changes have been effective in curbing rapid price gains. While the IMF has called for the country to limit the use of government-backed mortgage insurance to limit taxpayer risk, Oliver said that any future steps he takes will be gradual.
Canada’s real estate market has shown unexpected strength this year as mortgage rates declined to the lowest on record. Household credit-market debt, which includes mortgages, rose to 163.6% of disposable income in the second quarter, close to the record 164.1% in the third quarter of last year, the nation’s statistics agency reported.
Canada will have “more balanced growth” through 2015 as exports and business investment pick up, the IMF report said.
Gross domestic product will increase by 2.3% this year and 2.4% in 2015, the IMF forecast, roughly unchanged from its July outlook. Exports will be lifted by a weaker Canadian dollar and stronger U.S. demand, the IMF said. U.S. economic growth will quicken to 3.1% next year from 2.2% this year.
Bank of Canada Governor Stephen Poloz has kept his benchmark interest rate at 1%, extending a pause that now exceeds four years. The IMF said “accommodative monetary policy remains appropriate” because of slack in the economy and modest inflation.
Inflation will match the central bank’s 2% target next year and the unemployment rate will fall to 6.9% from 7%, the IMF said. Canada’s jobless rate was as low as 5.9% in September 2007, before the last recession.
The booming luxury home market in Calgary continues to soar as MLS sales of properties over $1 million are 18 per cent higher so far this year than a year ago when the all-time annual record was set.
According to realtor Mike Fotiou, associate broker with First Place Realty, until the end of September there have been 684 luxury home sales, up from 581 during the same period last year.
For annual sales, the peak was set in 2013 at 726 luxury home sales, eclipsing the previous high mark of 544 in 2012.
“The reason the market continues to see elevated sales is a function of how strong the market is. The sales would be substantially higher if the inventory was higher,” said Rachelle Starnes, realtor with Royal LePage Foothills, who specializes in the high-end market. “Traditionally, the market goes down at this time of the year but we have a situation where we have a lot of buyers looking for houses.
“We’ve got a healthier than normal market this time of the year but don’t have a lot of inventory. There are lots of potential buyers that have been looking for four or five months and when a property comes on the market at this time of the year for the right price, it sells quickly. Every indicator is that the market is strong. We are getting sustained sales growth during a normally relaxed period at the present time and expect this to continue through to the end of November.”
Every month this year has set a new peak for luxury home sales for those particular months.
September was no different, said Fotiou, as sales climbed to 73, handily beating the previous high of 59 set last year.
“Sales activity in the million-plus segment of the market continues to rise,” said Ann-Marie Lurie, chief economist with the Calgary Real Estate Board. “This is mostly related to activity in the single-family sector. Year-to-date single-family sales over one million account for 4.6 per cent of all the single-family sales, a consecutive increase in market share since 2012 when this segment represented only 3.1 per cent of the market.
“Citywide price gains have pushed more homes into the million-plus category. In addition, the price growth has provided equity gains for some purchasers, enabling them to move up to the higher-priced homes. This combined with low lending rates, rising wages and a positive employment outlook has contributed to the rise in resale activity in this segment. Barring any significant change to underlying economic fundamentals, sales activity for homes priced over one million will continue to represent a larger share of total activity for the remainder of the year.”
Fotiou said there were 222 high-end sales in the third quarter, a 16.2 per cent hike year-over-year.
The most expensive sale in September was a Briar Hill home that sold for $4.6 million. Altadore/River Park and Elbow Park/Glencoe led the way with six sales each, followed by Aspen Hill and Lake Bonavista Estates with four each, added Fotiou.
Calgary’s resale housing market fell just short of setting a new peak for MLS sales during the month of September as the city recorded its highest level of transactions since 2005.
Calgary Real Estate Board said Wednesday there were 2,148 MLS sales in September, up 11.93 per cent from a year ago. The all-time record in September was 2,197, which was established in 2005.
Ann-Marie Lurie, CREB’s chief economist, said sales were much stronger than expected in September due to healthy sales in the condo apartment and condo townhouse market.
“There has been a big increase in condo activity,” she said. “It is a move towards more activity in that more affordable range. That’s really what they’re offering. You see the trend with the single-family market as less and less are available under $400,000.
“The long-term potential for Calgary is very good. There’s a lot of positive factors that are influencing our market. We still have people moving here. We still have jobs. All of that is translating into improved demand.”
The overall median price in September was $425,000, a hike of 5.59 per cent from a year ago, while the average sale price rose by 7.3 per cent to $487,300.
New listings jumped by 16.72 per cent to 3,260 and active listings at the end of the month were up by 17.01 per cent to 4,589.
In September, Calgary recorded its 18th consecutive month of year-over-year gains in MLS sales and 32nd consecutive month of annual price hikes.
After two straight months of year-over-year sales declines, the single-family market rebounded in September with 1,398 sales, up 3.48 per cent from last year. The average sale price of $567,653 increased by 10.81 per cent and the median price jumped by 8.61 per cent to $488,750.
“It’s also important to keep in perspective that it (the previous two months) was still a strong level of sales eventhough they were lower than the previous year,” said Lurie. “It points to the fact that the market’s been improving and part of it is there’s more listings.
“The market now is much more balanced than it was in the spring. And the single-family market’s more balanced. So there’s more choice. There’s options. People have some time to make decisions.”
Sales in the condo apartment category rose by 33.33 per cent to 432. The median price of $294,750 was up by 7.77 per cent while the average sale price climbed by 9.21 per cent to $326,264.
The condo townhouse sector saw year-over-year sales increase by 30.33 per cent to 318 as the median price rose by 6.8 per cent to $330,000 and the average price increased by 4.21 per cent to $352,813.
In the towns surrounding Calgary market, sales were up by 24.67 per cent to 470. The median price saw a 3.54 per cent year-over-year hike to $380,000 and the average price was up 3.9 per cent to $393,518.
CREB also keeps track of a benchmark price which it says is the price for typical home sales in the market. The benchmark price and percentage change from a year ago for each housing category are: overall, $460,400, 10.25 per cent; single-family, $512,800, 10.59 per cent; condo apartment, $298,800, 9.49 per cent; condo townhouse, $330,200, 10.4 per cent; and surrounding towns, $377,800, 9.89 per cent.