Housing Market News

MARKET NEWS: Housing prices flat-line across Canada

While Canada's housing prices are stabilizing Toronto's negative year-over-year price growth is capturing headlines — even though the GTA's market correction was predicted and expected
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Across the nation, real estate markets are correcting. While daily headlines trumpet ups (in condos) and downs (in listings) as well as downright drops (particularly in Greater Toronto’s sales activity), the reality is the current gold-standard in measuring price movement, Teranet-National Bank’s Home Price Index, shows stabilization.

Bluntly put, housing prices are flat-lining across the country but the headline-grabbing story rests solely in the centre of the universe: Toronto.

Negative price growth in Toronto’s real estate market

The June price increase for Toronto’s real estate market was an anaemic 1.15% — and well under current inflation rates of 2.22%. But it’s the annual change for Toronto’s property market that is capturing the headlines. At present, GTA’s price growth is at a 2.8% loss. In hindsight, we now know that July 2017 was the peak for Toronto’s housing prices.


GTA’s price correction was expected (and predicted!)

Economists get paid big bucks to track, assess and predict what will happen in the nation’s housing market which is why few (if any) were surprised by the recent existing home sales activity report findings. As for back as 2016, top analysts were predicting a significant slow down in the nation’s real estate market. Those predictions assumed that the slow down would occur in 2017, but ultra-low mortgage rates continued government pressure to slow specific real estate markets and fear over missing out helped market surge to new highs last year. So, a correction — particularly a significant correction in the GTA — only makes sense in 2018.

Toronto annual sales activity, all property types, 2005 to 2018
Toronto Annual Sales Activity, all property types, 2005 to 2018. Source: Toronto Real Estate Board, Zolo

So how did this frothy, fearful activity impact historical average annual sale prices? For a little perspective, we tracked the average annual sales price for all property types in Toronto from 2005 to 2018.

Toronto's historical average annual sale price for all property types
Toronto’s Average Annual Sales Price from 2005 to June 2018. Source: Toronto Real Estate Board, Zolo

There’s no doubt that in the last decade property value’s have surged. But the biggest gains were in the last 18 to 24 months.

Now, compare this strong upward trend in Toronto’s housing prices to the average number of days on the market during the same time period:

Historical average days on market Toronto 2005 to 2018
Toronto’s Average Days on Market from 2005 to June 2018. Source: Toronto Real Estate Board, Zolo

It doesn’t take an economist to figure out that prices consistently climbed as demand (represented by days on market) consistently dropped.

So, is there a reason for the recent drop in sales activity and prices? Yes. Call it buyer fatigue; call it a seasonal summer slow down; call it a lack of affordability or just call it the correction (the correction that was predicted and thwarted in 2017), but the slow down is just part and parcel of the real estate market sales cycle.

Welcome to the flat-line market

As respected National Bank economist and Teranet-National Bank Home Price Index report author, Marc Pinsonneault, writes, “June’s rise in the index, impressive at first sight, was, in fact, weak for this time of the year. Indeed, if the Index were purged from seasonal patterns, it would have been about flat over the last three months.”

Turns out the Teranet-National Bank Home Price Index (HPI) was up 0.9% in June compared to the previous month and is 2.87% above June 2017. While this doesn’t sound terrible it is the smallest price gain on record since 2013.

Ok, but in a nutshell, what does this mean? According to Pinsonneault, it means the index (and aggregate housing prices) is stabilizing. Activity is dramatically slowing (due to various factors, including tougher mortgage regulations, increased housing costs and higher mortgage rates) and, as a result, prices are declining. This is a normal part of the real estate cycle — a cycle Glen Mueller, a Denver University Professor, wrote about back in 1995.

Canadian real estate market cycles. canada-housing-prices-stabilize

Aggregate correction masks regional differences

However, just because Canada’s overall housing prices are correcting and stabilizing doesn’t mean that all property types and markets are slowing or correcting at the same pace. Pinsonneault is quick to point out that at such a macro-level, the HPI may actually be hiding different pricing trends for regional markets and for different property types. For instance, condo prices in Toronto and Vancouver rose quickly since the start of this year (after seasonal adjustment, 7.8% and 16.3% annualized respectively), while prices for other types of dwellings held their ground. “The resiliency of prices for the [single family homes] is indeed reassuring in view of higher interest rates and stricter mortgage qualification rules that dampen demand for the most expensive categories of dwellings,” writes Pinsonneault.

To be clear, the Teranet-National Bank Home Price Index (HPI) tracks home prices against a base level of 100 which is set in June 2005. The HPI currently sits at 223.82, meaning a rise of more than 123% over the past 13 years.

What does this mean for current homeowners?

For those already in the marketplace, the real threat is whether or not changing conditions will erode overall household net worth.

Going back to those 2016 predictions of a market correction, we can dig up a December 2016 report by DBRS, a Canadian-based ratings agency. The report authors suggest that the average Canadian household had a net worth of $726,000 CDN — 74% of this net worth was tied up in a home’s equity

Based on these numbers, Canadian homeowners can withstand even a large market crash. For instance, if housing prices were to plummet by 20% to 40%, Canadian household equity ratios would continue to remain strong — decreasing to a low of 56.7% and a high of 67.5%.

In relative terms, that’s like owning a home valued at $900,000 one day, but still paying off a $234,000 mortgage, only to see the home’s value drop to $744,300 (while your mortgage debt remains the same). The idea of losing equity is never palatable, but this extreme scenario shows that even in a market crash, current homeowners are still in the black.

Romana King
Romana King

Romana is an award-winning personal finance writer with an expertise in real estate. She is obsessed with the property marketplace and is the current Director of Content at Zolo.