Canada’s existing home sales grow in February, home price growth likely to slow in 2016

Existing home sales in Canada grew 0.8% m/m and 18.7% y/y in February. Sales are trending close to the 2007 peak levels for the second continuous month. Listings grew just 0.5% in January, pushing the sales-to-listings ratio up to 59.5% in February, 0.2 percentage points up from the prior month. The increasing degree of bargaining power of sellers has increased the average existing home prices by 16.4% y/y. The metric rose 8.5% y/y in quality adjusted basis.

The real estate market in February was driven by markets in Ontario and British Columbia. Excluding Ontario and British Columbia, average existing home prices declined 1.4% y/y. The MLS HPI increased 22% in Vancouver and 11% in Toronto. Price pressures in these places are beginning to become broader throughout condos and single-family homes.

In contrast, home prices in Calgary declined 3.5% y/y. Meanwhile, the market in Montreal has also been gaining pace in recent months. Sales in the city increased 15% y/y; however, the market there has been kept in balanced territory and price growth under wraps by high inventory levels.

On 15 February, new down payment requirements for insured mortgages between $500K and $1 million kicked in. Certain strength in the country’s most expensive markets might indicate some buyers hurrying to get ahead of new rules. In the following months some payback is expected. However, the new rules are expected to have only a moderate impact on existing home sales in Canada as they are focused at a small share of the market.

The themes of Canadian housing that were clear in the recent years are expected to continue in 2016. Low interest rates are likely to counter increasing unemployment that is expected to rise to 7.5% by mid-2016. The weak economic conditions are expected to prevail in t he Prairies where the jobless rate has already increased. Meanwhile, low financing costs will be the main growth driver in markets that are fairly balanced, such as Halifax and Montreal.

There is slightly less certainty regarding the interest rate channel in Vancouver and Toronto. In both the markets housing affordability is declining. Along with the new mortgage qualification rules, demand is likely to be tampered in the two markets through the remainder of 2016.

“Overall, we expect Canadian home price growth to slow to below 3% y/y this year, but prices in Toronto and Vancouver should continue to grow well above that pace for the remainder of the year”, says TD Economics.