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CANADIAN HOUSING HEALTH CHECK

Overheated Toronto market elevates housing risks in Canada

Local housing risk indicators now show significantly higher vulnerabilities in To-

ronto and other Southern Ontario markets amid signs of overheating. Risk profiles in

other markets generally improved slightly recently.

Nation-wide, the probability that a steep and widespread downturn would take place

in Canada’s housing market in the next 12 months remains low; however, it has in-

creased due to increasing evidence of overheating in Ontario.

Housing policy: Ontario announced on April 20 a series of 16 measures to address

housing risks in the province. While this is generally a positive development, the ef-

fectiveness of these measures is uncertain at this point. The broadening of rent control

to all rental units in the province, however, could have perverse effects on the market.

Tax on foreign buyers in Vancouver: The Vancouver market has adjusted in an

orderly fashion to the 15% tax on home purchased by foreign nationals. Its dampen-

ing effect on homebuyer demand may be waning, however.

Escalating prices in Canada’s hot markets: Affordability-related vulnerabilities

remain high in Toronto (where they continued to increase recently) and Vancouver

(where they have decreased modestly since the fall).

Energy sector downturn: Improving trends and prospects for oil prices have been

positive developments for housing risk profiles in oil-producing provinces. There are

increasing signs that Alberta’s housing market has begun to recover.

Unemployment: Labour market-related risks have eased recently. In particular, there

was notable improvement in Alberta where the unemployment rate has started to de-

cline from decade-high levels late last year.

Condo construction boom: The risk of over-building generally has diminished con-

siderably thanks to declines in unsold inventories across most markets. Nonetheless,

high levels of construction in Vancouver now face more moderate demand and slower

population growth, which could develop into an overbuilt situation.

Interest rates: Interest rate risks are still contained. A run-up in bond yields last fall

has partly reversed since then. The odds of a spike in rates are low in the short term.

April 2017

Largest four housing markets

Toronto — There are worrisome signs

of overheating in the GTA market.

Demand is supercharged and prices

are sky-rocketing. The surge in proper-

ty values has become widespread

across all housing types and areas

within (and outside) the GTA. Runa-

way prices threaten the future stabil-

ity of the market. Policy measures

announced on April 20 are a positive

step for the most part.

Montreal — Home resales rose solidly

for the second-straight year in 2016,

and had a good start to 2017. The re-

gion’s impressive employment gains in

the past year no doubt contributed

positively. The earlier home inventory

issues continue to evolve constructive-

ly. Montreal’s overall vulnerability

profile continues to improve.

Vancouver — Despite recent improve-

ments, extremely poor affordability is

still a major vulnerability. Policy

measures to address housing risks have

contributed to cooling the market

down. Home prices have stabilized,

although they remain well above year-

ago levels. A crash is unlikely given

still-solid economic underpinnings.

Calgary — Early signs of an economic

recovery have improved the risk pro-

file. High condo and rental inventories

are still sources of concerns. A drop in

condo construction and an improving

trend for home resales have been posi-

tive developments suggesting that

risks might ease further in the period

ahead.

Canada Vancouver Calgary Toronto Montreal

Affordability

Resale market balance

Rental market balance

Interest rates

Labour market

Demographics

New home inventory - singles

New home inventory - multiples

Homes under construction - singles

Homes under construction - multiples

Significantly outside historical norms and posing much higher risk than usual

Modestly outside historical norms and posing moderately higher risk than usual

Within historical norms or not posing any immediate threat

Monitoring dashboard

Craig Wright

Chief Economist

(416) 974-7457

[email protected]

Robert Hogue

Senior Economist

416-974-6192

[email protected]

CANADIAN HOUSING HEALTH CHECK | APRIL 2017

2

Background

Canadian Housing Health Check provides RBC Economics’ assessment of key indicators of Canada’s housing market that are

deemed to offer early warning of potential imbalances. This monitoring exercise is one of the tools used regularly by RBC Econom-

ics to follow developments in this important sector of the Canadian economy. The report focuses on indicators that have been closely

correlated (leading or coincident) with housing downturns and significant home price declines during housing cycles in the past three

decades or so. While we believe that housing affordability and the sales-to-new listings ratio (and months’ inventory) are the best

indicators of market stress and price pressure, respectively, no single indicator provides perfect and accurate early warning signals of

impending trouble. Accordingly, Canadian Housing Health Check emphasizes a ‘dashboard’ approach to convey the point that trou-

ble in the housing market can arise from many directions and that it is imperative to monitor the situation broadly. This approach is

complemented by a detailed review of individual indicators that includes a graphical depiction of the current situation within a his-

torical context and a brief discussion of the rationale of our assessment.

About the graphics and risk ‘zone’ system The dashboard graphics display the current values of the indicators (dark blue bar) within zones that we consider safe (green), con-

cerning (yellow) or dangerous (red). The width of each graphics represents the range of values posted by the indicator during the past

30 years (or period of time available). The far left corresponds to the safest measure ever recorded and the far right, to the most ex-

treme imbalance reached historically. For most indicators, the left corresponds to low values but for some (sales-to-new listings ratio

and net immigration) to high values.

The yellow and red zones appearing in dashboard graphics and individual indicator charts generally were determined by analyzing

past housing downturns and constitute our estimations of thresholds above (or, in some cases, below) which market imbalances and

significant home price declines occurred at the national level in Canada. The yellow zone comprises a range of values that, histori-

cally, have been mostly associated with imbalances but not always with housing downturns (i.e. sustained price declines). In other

words, these values give somewhat ambiguous and sometimes ‘false’ signals. The red zone, however, comprises values that repre-

sent imbalances much more clearly and of larger magnitude. An indicator in the red zone should be considered a source of worry.

The farther to the right in the red zone in the dashboard graphics are the values, the more extreme is the imbalance, the more intense

is the stress exerted on the market and, ultimately, the more severe the potential correction.

The specific rules at the national level are as follows:

RBC Affordability Measure for the aggregate of all housing types: yellow threshold = 41.5% (0.3 standard deviations above

the long-term mean); and red at 45.1% (1.0 standard deviations above the mean).

Sales-to-new listings ratio: yellow threshold = 0.40; and red = 0.35.

Months of inventory: yellow threshold = 7.0; red = 8.5.

Rental vacancy rate: yellow threshold = 3.2% (long-term mean); and red = 3.7% (0.5 standard deviations above the mean).

Real 5-year bond yield relative to trailing 12-month average: yellow threshold = 1.0 percentage point (1 standard deviation

above the mean); red = 2.0 percentage points (2 standard deviations).

Unemployment rate relative to trailing 12-month average: yellow threshold = 0.41 percentage points (0.6 standard deviation

above the mean); red = 0.9 percentage points (1.5 standard deviations).

Net immigration per 1,000 population: yellow threshold = 6.5 (0.5 standard deviations above the mean); red = 5.0 (0.4 stand-

ard deviations below the mean).

Completed and unoccupied units per 1,000 population, singles and semis: yellow threshold = 0.29 (0.3 standard deviations

above the mean); red = 0.36 (1.3 standard deviation above the mean).

Completed and unoccupied units per 1,000 population, multiples: yellow threshold = 0.36 (the mean); red = 0.47 (0.9 stand-

ard deviation above the mean).

Housing under construction per 1,000 population, singles: yellow threshold = 2.11 (0.5 standard deviations from the mean);

red = 2.33 (1 standard deviation from the mean).

Housing under construction per 1,000 population, multiples: yellow threshold = 3.93 (0.5 standard deviations from the

mean); red = 4.58 (1 standard deviation from the mean).

The areas shaded in grey in the indicator charts correspond to housing downturns – i.e., periods during which home prices (as de-

fined as average prices of homes sold on the MLS system) fell by more than 5% from monthly peak to trough. It is important to note

that the precise timing of these downturns can vary depending on the home price measure used. The grey shaded areas, therefore,

should be seen as broad guidelines.


3

CANADA

Affordability

Near-term: neutral

Medium-term: negative

Existing home market balance

Near-term: positive


Near-term: positive


Near-term: positive

Medium-term: positive

Demand fundamentals

Near-term: positive


Near-term: positive


Near-term: positive


Supply fundamentals

Near-term: positive


Near-term: positive


Near-term: positive


Near-term: positive


Risk implications

RBC affordability measure- aggregate

Low High

Sales-to-new listings ratio

LowHigh

Months of inventory

Low High

Change in real 5-Year bond yields

Low High

Low High

Housing under construction per capita - singles

Low High

YellowHousing under construction per capita - multiples

Low High

Yellow

Rental vacancy rate

Change in the unemployment rate

Low High

Yellow

LowHigh

Yellow

Net immigration rate

Low High

YellowCompleted and unsold units per capita - singles and semis

Low High

YellowCompleted and unosold units

per capita - multiples


4

Affordability

CANADA


20

25

30

35

40

45

50

55

60

65

70

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

RBC affordability measure - aggregate

Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage

Ownership costs as % of household income, Canada

In our view, affordability is the most meaningful indicator of underlying

market stress. Other traditional metrics such price-to-income and price-to-rent ratios can be useful guides of market imbalance under many circumstances;

however in the current environment, affordability is a superior gauge because

it explicitly takes into account interest rates (the other measures don’t), which have been—and, in the near term, expected to remain—abnormally low.

The most recent reading of RBC’s aggregate housing affordability meas-

ure (44.2% in Q4 2016) suggests the presence of greater-than-average

market stress for buyers in Canada with the situation steadily deteriorat-

ing since the spring of 2015. Affordability is most stretched for single-

detached home in Canada’s largest markets. Condo affordability (35.9%)

is generally closer to its historical norms, which implies less stress in this

category.

We estimate the ‘danger zone’ for the aggregate measure to be above 45.0%

nationally.

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Monthly, S.A.


Source: RBC Economics Research, Canadian Real Estate Association

Monthly, S.A., Canada


Buyer's market

Balanced market

Seller's market

The sales-to-new listings ratio is a reliable gauge of the degree of slack or

tightness in the resale market. When the ratio approaches, or is above 0.60, the market favours sellers and prices typically rise rapidly. When the ratio

approaches, or is below 0.40, the market favours buyers and prices come

under intense downward pressure. Anything in between is considered a bal-anced market and prices tend to rise modestly.

Canada-wide, the sales-to-new listings ratio climbed into seller’s market

territory early in 2016, and reached a 13-year high of 0.68 in the first

quarter of 2017. Home resales jumped in February and March, 2017, in

Canada after trending downwardly during the summer and fall last year.

New listings have plummeted in the fall and have remained low since

then. Virtually all markets in Southern Ontario (including Toronto) and

BC have conditions favouring sellers.

Historically, the largest price declines occurred when the ratio fell below

0.35.

0

1

2

3

4

5

6

7

8

9

10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Long-term average

Monthly, S.A., Canada

Months of inventory


The total number of homes for sale expressed as the number of months it

would take to sell them at the current pace of sales is another resale market balance indicator. Historical correlation with prices is difficult to establish

with precision, however, because the Canadian Real Estate Association has

been publishing this indicator only since 2004.

Nonetheless, based on what track record is available, we estimate that down-

ward pressure on prices start to build at levels between 7.0 and 8.5 months,

and that severe pressure emerges at levels exceeding 8.5.

The drop in listings amid still-strong resales reduced the number of

months’ inventory in Canada to the lowest level (4.1) in almost 10 years

in March. This level is consistent with continued price increases.

Demand-supply balance indicators for the existing home market, there-

fore, continue to suggest little in the way of any imminent drop in prices

in the national market.

0

1

2

3

4

5

6

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Long-term average

Rental vacancy rate

Annual:1988-2010; Semi-annual: 2011-currentSource: RBC Economics Research, CMHC

%, total CMAs, purpose-built apartment buildings of three units or more, Canada The rental vacancy rate has not correlated very closely with prices historical-

ly. However, we believe that the Canadian housing story will be very sensi-

tive to the supply of new units into the marketplace, much of which (almost

entirely condos) will be directed toward the rental market. Therefore, this

gauge of market absorption in the rental segment should be monitored close-ly.

A main drawback of the vacancy rate as a monitoring tool is that it is pub-

lished only once a year (in October) by CMHC.

The latest data for October 2016 shows further marginal increase from

3.3% in October 2015 to 3.4% at the national level, which slightly ex-

ceeds the long-term average (3.0%). The rise since 2014 primarily reflect-

ed large increases in Alberta and Saskatchewan.

We would consider a vacancy rate above 3.5% as a sign of oversupply in the

rental space.


5

Demand fundamentals

CANADA

Supply fundamentals

-4

-3

-2

-1

0

1

2

3

4

5

6

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage points, Canada

Real 5-year bond yields relative to trailing 12-month average

Source: RBC Economics Research, Bank of Canada, Statistics Canada

Surges in interest rates have been strongly associated with market downturns

and price declines in several housing cycles in the past 30 years in Canada.

A 100 basis-point rise relative to the trailing 12-month average would apply

intense downward pressure on the market and a 200 basis point surge would likely destabilize it and potentially cause a significant price decline.

The yield on the five-year Government of Canada bond surged last No-

vember; however, it has remained relatively stable since then at still-low

historical low levels. The real yield stood 53 basis points above its 12-

month trailing average in February, which posed minimal threat to the

market.

RBC’s base case interest rate forecast calls for the overnight rate to

remain unchanged until early-2018, and for longer-term rates to contin-

ue to drift modestly higher. This scenario would present only modest

risks to the housing market in the near term.

-2

-1

1

2

3

4

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage points, Canada

Unemployment rate relative to trailing 12-month average

Source: RBC Economics Research, Statistics Canada

Similarly, spikes of unemployment have been associated with housing down-

turns in the past 30 years, although they have tended to lag price declines rather than lead them.

We estimate that a 0.25 percentage point increase in Canada’s unemployment

rate relative to the trailing 12-month average would stress the market moder-

ately, but that a full percentage-point surge would threaten its stability.

The unemployment rate has trended downwardly since the beginning of

2016. It reached an eight-year low of 6.6% in February. The rate has

been below its trailing 12-month average since May 2016.

Labour market conditions pose little risk nationally at this point. Such is

not the case everywhere across the country, however. Labour market-

related risks are elevated in oil-producing provinces.

1

2

3

4

5

6

7

8

9

10

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Trailing 4-quarter sum, Canada, per 1,000 population

Net immigration rate


Net immigration into Canada is another indicator that has not correlated

closely with housing downturns or price declines historically; however, given

the boom in condo construction in major Canadian cities, any sign that the

strong inflow of immigrants is slowing would be concerning.

The rate of net immigration in Canada (measured per 1,000 population)

has surged since late-2015, after falling between late 2014 and mid-2015.

The latest rate for Q3/16 rose to a multi-decade high of 9.4. This is now very

comfortably above the 6.5 threshold signalling some degree of vulnerability.

The rate is likely to remain elevated in light of the federal government

maintaining a high target (300K) for new permanent residents in the

country in 2017.

0.0

0.1

0.2

0.3

0.4

0.5

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Units per 1,000 population, Canada, n.s.a.

Completed and unsold units - singles and semis

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

A telltale of an overbuilt market is the number of units recently completed but

remaining unsold.

We segment the Canadian market into singles and multiples to identify poten-

tial sources of trouble.

On the single-family homes side, the stock of unsold units has dipped

slightly since the summer of 2016 to 0.22 units per 1,000 population by

February, thereby resuming a downward trend after stabilizing between

mid-2014 and mid-2016. There continues to be no signs of any excess

supply of new single-detached units in Canada at this stage. If fact, the

opposite is the case in several markets where single-detached are in short

supply.

We would consider the situation concerning at 0.29 units and dangerous at

0.36 units.


6

Supply fundamentals

CANADA

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average


Completed and unsold units - multiples


On the multi-unit dwellings side, market absorption has been solid

throughout 2016 and early-2017 amid slower completions compared to

2015 (when a spike in condo completions in Toronto occurred early in the

year). This helped to draw down the inventory of unsold units in Canada.

The rate of unsold units eased to 0.33 units per 1,000 population in Feb-

ruary 2017, down from a 19-year high of 0.41 units in May 2015.

The latest read of this indicator was slightly below the long-term average

(0.36) and well below the 0.48 threshold that would signal a high degree

of excess.

Overall, the inventory of completed but unsold condos evolved construc-

tively in the past 18 months in Canada, thereby muting oversupply risks.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average


Housing under construction - singles


The object of much concern in recent past has been the number of housing

units under construction in Canada.

We continue to find that little concern of overbuilding is warranted in the

single family home segment, where levels remain well below historical

averages (when measured on a per 1,000 population basis) with the trend

even declining slightly in the past several years, although a slight uptick

appears to have taken place since the late stages of 2016.

In some of Canada’s largest markets, demand for single family homes

significantly outstrips supply.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average


Housing under construction - multiples


On the multiples side, however, there continues to be historically-high

levels of condo units under construction in Canada.

There were 5.8 multi-unit dwellings per 1,000 population under construc-

tion in Q1/17, virtually matching the decades-high reached in 2014.

Strictly speaking, this level is well into the ‘high risk zone’ (4.6 units or

higher); however, in the context of tight demand-supply balances in mar-

kets such as Toronto and Vancouver, strong construction should be seen

as being part of the solution to restrain price increases.

Most of the units being built are in the Toronto (32% of total) and Van-

couver (18%) areas.

Strong condo construction in large part reflects structural changes that

arose from policy (e.g. rules limiting urban sprawl) and affordability

(condo apartments are the more affordable housing type) considerations,

and therefore, represents a market share gain over single-family homes.

Nonetheless, the prospects for high levels of condo completions in the

period ahead potentially entail a fair degree of absorption risks over the

medium term.


7

GREATER TORONTO AREA

Affordability

Near-term: negative



Near-term: positive


Near-term: positive


Near-term: positive


Demand fundamentals

Near-term: positive


Near-term: neutral


Near-term: positive


Supply fundamentals

Near-term: positive


Near-term: positive


Near-term: positive


Near-term: positive

Medium-term: neutral

Risk implications


Low High


Low High


LowHigh

Months of inventory -

OntarioLow High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

YellowCompleted and unsold units per

capita - multiples

Low High


Low High



8

Affordability in the GTA has been on a deteriorating trend since 2012

with the pace of deterioration accelerating since 2015. RBC’s measure is

now in a zone that historically has been associated with a high risk of an

ensuing negative outcome.

Most of the affordability pressure is concentrated in the single-family

home side of the market; however, stress has increased in the condo seg-

ment as well lately, with condo prices escalating rapidly in the past year.

Stretched affordability does not appear to be a primary consideration for

GTA homebuyers at this stage. By all accounts, demand is supercharged.

Home resales remain on a record-setting pace so far in 2017.

Sky-rocketing prices pose a substantial risk to the future stability of the

market.

The Toronto-area market would be more sensitive to a substantial rise in

interest rates than most markets in Canada due to its high prices.

Demand-supply conditions remain extremely tight in the GTA. This is

clearly a sellers’ market. The sales-to-new listings ratio reached a 31-year

high of 0.94 in January 2017 before easing to 0.77 by March, still far

above the 0.60 threshold marking conditions favouring sellers. Tight

market conditions fuel strong—and still accelerating—price increases for

all types of housing and in all areas within (and outside) the GTA.

At this stage, the sales-to-new listings ratio suggests little in the way of

any imminent price declines in the area.

On the contrary, if left unchecked, current conditions point toward fur-

ther acceleration in price gains in the coming months, thereby further

exacerbating the GTA’s affordability challenges.

Over the medium term, however, the current overly tight market condi-

tions and runaway prices threaten to destabilize the market.

Affordability



0

1

2

3

4

5

6

7

8

9

10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Long-term average

Monthly, S.A., Ontario

Months of inventory


Demand-supply tightness is corroborated by exceedingly low inventories

of homes for sales (active listings).

Although CREA data is available only at the provincial level, the number

of months’ inventory in Ontario is at its lowest point (1.5 months in

March 2017) since records have been published by the Canadian Real

Estate Association (2003).

Separate data from the Toronto Real Estate Board shows that the num-

ber of months of inventory in the Toronto area was 1.0 in March 2017,

down from 1.7 a year earlier and 2.2 at the end of 2014.

Concerns that Toronto’s condo boom would flood the rental market and

cause vacancies to rise have not materialized to date.

The rental vacancy rate in the GTA has remained low in recent years. In

fact, it fell slightly in October 2016 to 1.3% from 1.6% a year earlier.

Toronto Real Estate Board statistics showed that condo rental activity

fell in Q4/16 relative to a year earlier due to a sharp drop in the number

of units listed for rent (down 14%) following very strong growth in 2015

when a spike in condo project completions brought many units onto the

rental market. Average rent continued to rise at a brisk pace (by more

than 7% y/y for a one-bedroom apartment).

So far, there is little evidence that condo investors who rent out their

units have overestimated rental demand.

20

30

40

50

60

70

80

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average



Ownership costs as % of household income, Toronto

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Monthly, S.A.



Monthly, S.A., Toronto


Buyer's market

Balanced market

Seller's market

0

1

2

3

4

5

6

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Long-term average

Rental vacancy rate

Source: RBC Economics Research, CMHC

%, purpose-built apartment buildings of three units or more, Toronto


9

Labour market conditions in the GTA continue to be generally support-

ive for the area’s housing market.

Despite rising modestly since an eight-year low of 6.5% in July 2016,

Toronto’s unemployment rate remains on a seven-year long downtrend.

The recent modest rise is unlikely to exert a negative effect on the mar-

ket, although the fact that the rate (7.1% in March) is marginally above

the trailing 12-month average suggests that it is unlikely to be a boosting

factor either.

Labour market-related risks remain low at this point.

Demand fundamentals


Supply fundamentals

-2

-1

1

2

3

4

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage points, Toronto



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Y/Y % change in the 15+ population, Toronto

Adult population growth


Solid demographic fundamentals have long supported GTA’s housing

market.

Those fundamentals improved since early 2016, following a period of

softening in 2014-2015.

The rate of growth in adult population picked up from 1.6% in mid-2015

to 1.8% most recently, thereby inching closer to GTA’s long-term aver-

age of 1.9%.

A rate below 1.5% would be a source of concern.

GTA home builders are responding to the dearth of single-family homes

in the area, with single-starts rising 16% in both 2015 and 2016 (from

historically low levels in 2014).

This is as a positive development that will help address the tightness issue

in this housing category.

Inventories of newly completed and unsold the single-family continue to

be historically low despite trending slightly higher in the past four years.

There is no indication of overbuilding of single-family homes in the area

at present.

The inventory of recently completed and unsold condo units last year

ceased to be a concern in the Toronto area.

Absorption of newly built condos has been brisk in the GTA since late

2015 and stocks of unsold units have come down considerably.

The unabsorbed inventory fell from a 22-year peak of 0.58 units per

1,000 population in May 2015 to 0.20 units between October 2016 in

February 2016, which is within the ‘safe zone’—i.e., below the 0.27

threshold signalling the potential for mild excess supply.

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Units per 1,000 population, Toronto, n.s.a.



0.0

0.2

0.4

0.6

0.8

1.0

1.2

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average





10

Supply fundamentals


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




Single-detached starts picked up in both 2015 and 2016, and boosted the

number of such units under construction; still, the increase has not been

excessive as the most recent level equaled the long-term average for the

area when measured in per 1,000 population terms.

The current pace of construction activity therefore does not signal any

impending wave of single-unit supply that might cause trouble for the

market.

In fact, the strong signals coming from the GTA’s existing home market

say that even more units are needed to meet supercharged demand in the

near term.

Policy to reduce urban sprawl and favour higher density urban develop-

ment contributed to a significant slowdown in single-detached home

construction since the mid-2000s.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




The number of multi-unit dwellings under construction continues to be

historically high, although it has moderated in the last two years.

Expressed on a per 1,000 population basis, multi-unit construction re-

mains in a high risk zone; however, the potential threat to the market is

tempered by the healthier unsold condo inventory and very strong de-

mand in the existing home market.

The main risk of high levels of construction is that many units could

reach the completed stage at once, thereby flooding the condo resale and/

or rental markets. So far, both of these markets have absorbed the in-

creased supply quite handily.


11

GREATER MONTREAL AREA

Affordability

Near-term: positive



Near-term: positive


Near-term: neutral


Near-term: neutral


Demand fundamentals

Near-term: positive


Near-term: positive


Near-term: positive


Supply fundamentals

Near-term: positive


Near-term: neutral


Near-term: positive


Near-term: negative


Risk implications


Low High


Low High


LowHigh


QuebecLow High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

YellowCompleted and unsold units per capita - multiples

Low High


Low High



12

Affordability



Existing home supply expressed as number of months’ inventory shows a

declining trend in Quebec since early 2015 from elevated levels. In fact,

that metric just exited the high-risk zone in March.

This is consistent with the modest but steady firming in marked condi-

tions in Montreal.

A wave of condo completions in 2014 (+18%) increased competition for

purpose-built apartment buildings, which has translated into higher

rental vacancy rates in 2015.

The opposite then occurred, whereby a sharp drop in condo completions

in 2015 (-28%) contributed to a slight easing in the vacancy rate from

4.0% in October 2015 to 3.9% in October 2016.

Such a rate continues to signal some mild degree of oversupply in the

rental market.

20

25

30

35

40

45

50

55

60

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average



Ownership costs as % of household income, Montreal

Affordability deteriorated slightly in the Montreal area in 2016 after

showing an improving trend in the previous six years. Despite the recent

erosion, affordability does not pose any unusual stress for buyers at this

point.

RBC’s aggregate measure was 40.2% in Q4/16, up 1.3 percentage points

from a year ago but still within the safe range.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Monthly, S.A.



Monthly, S.A., Montreal


Buyer's market

Balanced market

Seller's market

Demand-supply conditions in the Montreal area have tightened gradually

since 2014. The sales-to-new listings ratio continued to drift higher in

2016 and early-2017, reaching 0.61 in near the highest point in more than

six years.

Home resales grew at the solid pace of 6% for the second-straight year in

2016, a pace that was maintained in the first quarter of 2017. Robust

sales activity took place amid a decline in the number of homes put out

for sale each month, which resulted in a significant drawdown in invento-

ries, especially in the single-detached segment. Condo inventories—which

had been a significant issue earlier—also fell, although they remain quite

plentiful in the area.

The upward trend in the sales-to-new listings ratio suggests that the rate

of price increases may strengthen in the period ahead, and do not point

to any imminent risk of a sharp decline.

0

2

4

6

8

10

12

14

16

18

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Long-term average

Monthly, S.A., Quebec

Months of inventory


0

1

2

3

4

5

6

7

8

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

long-term average

Rental vacancy rate


%, purpose-built apartment buildings of three units or more, Montreal


13

Montreal’s job market has been very strong since mid-2016. The unem-

ployment fell impressively by 1.9 percentage points in the past 12

months. It stood at 6.6% in December, its lowest level since June 2007.

The drop offered further support for the housing market and therefore

was a significantly positive development from a risk point of view.

Demand fundamentals


Supply fundamentals

Following a two year-long period of easing growth, Montreal’s adult

population has grown at an increasingly faster rate since mid-2015, and

returned to its long-term average of 1.0% most recently.

Overall demographics currently pose little risks for the market.

-2

-1

1

2

3

4

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage points, Montreal



0.0

0.4

0.8

1.2

1.6

2.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Y/Y % change in the 15+ population, Montreal



0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Units per 1,000 population, Montreal, n.s.a.



There continues to be very few newly completed single-family homes that

are unsold in the Montreal area.

We see no evidence of an overbuild in this market segment.

0.0

0.4

0.8

1.2

1.6

2.0

2.4

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




On the multi-unit dwelling side, conditions improved noticeably since

2015 with the stock of unabsorbed units declining markedly. The stock

fell from 0.91 units per 1,000 population in August 2015 to 0.68 units by

February 2017—matching the long-term average.

This suggests that the earlier surplus of multi-unit dwellings has been

largely resolved in the Montreal market.


14

Supply fundamentals


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




The risk of any overbuilding of single-family homes in the short term is

extremely remote.

Current levels of units under construction are significantly below long-

run averages and well within the ‘safe zone’.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




A noticeable increase in multi-unit dwelling starts since mid-2016 has

pushed the number multi-unit dwellings under construction higher in the

Montreal area in recent months.

In per 1,000 population terms, that number rose from 4.9 in July 2016 to

5.6 in February 2017, just a tad below the all-time high of 5.8 units rec-

orded in January 2016.

The number of multi-unit dwellings under construction, thus, remains

historically elevated and still poses a potential risk of overbuilding.

Strong condo construction activity in the past decade partly reflected a

structural shift toward multiples supported by urban development policy

and affordability advantage relative to single-family homes.


15

GREATER VANCOUVER AREA

Affordability

Near-term: negative



Near-term: positive


Near-term: positive


Near-term: positive


Demand fundamentals

Near-term: positive


Near-term: positive


Near-term: negative


Supply fundamentals

Near-term: positive


Near-term: positive


Near-term: neutral


Near-term: positive


Risk implications


Low High


Low High


LowHigh

Months of inventory - BC

Low High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

Completed and unsold units per

capita - multiples

Low High


Low High

Housing under construction per capita - multiples


16

Affordability



Some easing in the market tightness is also visible at the provincial level

where the inventory of homes available for sale measured in number of

months of sale has risen slightly since mid-2016; yet, the inventory re-

mains historically low.

This indicator still suggests the presence of upward price pressure in the

province—which increasingly reflects developments in other parts of the

province such as Victoria.

While clear signs have emerged that demand-supply conditions are eas-

ing in the home ownership market, conditions remain very tight in Van-

couver’s rental market.

The area’s rental vacancy rate continued to decline in 2016, reaching a

eight-year low of 0.7% in October. This is one of the lowest vacancy rates

in Canada.

Vancouver’s rental market, therefore, shows no evidence of any looming

surplus that would cause concerns for the home ownership market.

20

30

40

50

60

70

80

90

100

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average



Ownership costs as % of household income, Vancouver

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Monthly, S.A.



Monthly, S.A., Vancouver


Buyer's market

Balanced market

Seller's market

Despite a small improvement at the end of 2016, extremely poor housing

affordability continues to pose a major risk for the Vancouver-area mar-

ket.

Affordability stress is found in both single-family and condo apartment

categories; however, it is far more intense in the former.

At 84.8% in Q4 2016, RBC’s aggregate affordability measure for the

area was close to the worst level on record.

Poor affordability is likely among the factors contributing to a significant

moderation in home resales in the area since a peak was reached in the

winter of 2016. Policy changes—including the surprise implementation of

a new tax on purchases made by foreign buyers in August—also likely

contributed.

Demand-supply conditions in the Vancouver area have eased since spring

last year, after heavily favouring sellers for nearly two years.

The sales-to-new listings ratio plummeted from an incredibly tight 0.89

in January 2016 to 0.56 in August (a level consistent with a balanced

market) before rebounding in February-March to 0.72.

However, the speed with which sellers lost their grip on the market, in

combination with policy moves to cool the market down, has dimmed

price expectations and resulted in month-over-month price declines be-

tween September 2016 and January 2017, mostly in the single-detached

segment.

Prices have picked up slightly in February and March. Provincial statis-

tics show that some (although not all) foreign buyers had returned to the

area by the late stages of 2016 after moving to the sidelines following the

introduction of the foreign buyer tax.

0

2

4

6

8

10

12

14

16

18

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Long-term average

Monthly, S.A., British Columbia

Months of inventory


0

1

2

3

4

5

6

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Long-term average

Rental vacancy rate

Source: RBC Economics Research, CMHC

%, purpose-built apartment buildings of three units or more, Vancouver


17

The job situation in Vancouver has been positive in 2016 and early-2017

with employment up by 1.9% in March from a year ago, and the jobless

rate falling to the lowest level (4.7%) since 2008.

Labour market developments do not pose any immediate threat to the

housing market. On the contrary, they offer substantial support current-

ly.

Demand fundamentals


Supply fundamentals

Adult population growth has slowed in the past year from 1.9% y/y in

March 2016 to 1.4% in March 2017. The rate of growth has dipped mar-

ginally below the threshold (1.5%) signaling the presence of elevated

risks.

Any sustained period of slower-than-usual growth in population could

cause some issues for the high levels of housing construction in the area.

-2

-1

1

2

3

4

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage points, Vancouver



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Y/Y % change in the 15+ population, Vancouver



0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Units per 1,000 population, Vancouver, n.s.a.



Absorption of single-detached and semi-detached units has been quite

strong since early 2014, although there has been some modest easing

lately. The number of recently completed and unsold units has risen

moderately from 0.31 units per 1,000 population in May 2016 to 0.45 in

February 2017—still well into the ‘safe zone’ and below the long-range

average of 0.60 units.

With singles and semi-detached completions now trending slightly down-

wardly, the Vancouver-area market shows few signs of being overbuilt at

this point or becoming so in the near term.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




Similarly, the situation on the multi-unit dwelling side of the market

remains safe.

The number of completed and unsold units has trended lower since early

2014, reaching a nine-year low in August 2016 and staying flat since then.

Moderate levels of apartment completions in 2014 and 2015 limited the

flow of new supply into the market, and declining completions over the

latter half of 2016 and early-2017 reinforced this trend in recent months.

The Vancouver condo market does not appear to be overbuilt at this

point.


18

Supply fundamentals


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




Builders’ response to the shortage of single-family homes in the Vancou-

ver area became more vigorous in 2016 with starts rising by 12% from

2015. The sharp slowing in resale activity for single-detached homes

during the latter half of the year elicited a concomitant retrenchment in

single-detached starts in the fourth quarter (down 3.2% y/y) and first

quarter of 2017 (down 27% y/y). Nonetheless, strong starts prior to that

point drove the number of units under construction its highest level in

nearly 22 years in September before easing marginally since then.

On its own, the rising number of single-family homes under construction

suggest an increasing (albeit moderate) risk of oversupply in the period

ahead; however, low inventories of unsold single-detached homes helps to

mitigate that risk.

Fueled by very strong housing starts in 2016, the number of multi-family

units under construction (on a per 1000 population basis) rose to a new

record level, thereby signaling a greater-than-usual risk of imbalance in

this market segment.

Such risk is tempered by the still-tight market conditions in the resale

market and low inventories of newly built and unsold units.


19

CALGARY AREA

Affordability

Near-term: positive



Near-term: positive


Near-term: positive


Near-term: negative


Demand fundamentals

Near-term: positive


Near-term: positive


Near-term: negative


Supply fundamentals

Near-term: positive


Near-term: negative


Near-term: positive


Near-term: positive


Risk implications


Low High


Low High


LowHigh


AlbertaLow High

Low High

Yellow

Rental vacancy rate


Low High

Yellow

LowHigh

Yellow

Population growth

Low High


Low High

Completed and unsold units per capita - multiples

Low High


Low High



20

Affordability

CALGARY AREA


The overall inventory of homes for sale in Alberta has been drawn down

since early-2016 and no longer pose any unusual risk. The number of

months’ inventory fell to an average of 5.4 in the first quarter of 2017

from cyclical high of 6.8 in February 2016; yet, this was still well above

the 4.4 long-run average.

The Calgary Real Estate Board reported that active listings in the area

were down by 17% in March relative to a year earlier; however, the

average number of days it took a property to sell rose to 51 from 44 over

the same interval.

Balanced levels of inventory are consistent with moderate upward pres-

sure on prices in the short term.

The recent drawdown in active inventory has eased downside risks for

prices significantly in the area.

Calgary’s rental market appears to be over-supplied.

The rental vacancy rate surged to a record high of 7.0% in October 2016,

up from 5.3% in October 2015 and just 1.4% the year before that.

Such elevated vacancy rate raises significant downside risks for rent

values in the area and revenue prospects for condo investors.

Indeed, CMHC figures show that average apartment rent fell between

2.2% and 6.4% in 2016 depending on the size of the unit.

20

30

40

50

60

70

80

90

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average



Ownership costs as % of household income, Calgary

Housing affordability continues to be a generally constructive factor for

the Calgary-area market, remaining quite stable in past year (in the

range of 33%-34% for RBC’s aggregate measure).

In the recent difficult context—with the downturn in the energy sector

and surging unemployment sapping confidence for both buyers and

sellers—the good affordability standing reduces the risk of a significant

price decline.

Calgary faces many tough issues; however, there is no evidence to suggest

that affordability is one of them.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Monthly, S.A.



Monthly, S.A., Calgary


Buyer's market

Balanced market

Seller's market

After weakening considerably in 2015, demand-supply conditions im-

proved in 2016 and early-2017 on the back of a slight recovery in home

resales since spring last year (from a historically low base) and a reduc-

tion in new listings.

The sales-to-new listings ratio—which rose from 0.41 at the end of 2015

to an average of 0.63 in the first quarter of 2017—would suggest that the

Calgary market is favourable to sellers; however, there continues to be a

hefty inventory of active listings (2.7 months’ worth of supply in the City

of Calgary according to the Calgary Real Estate Board), especially for

condo apartments.

Signs of a progressive recovery in homebuyer demand have emerged in

the past year. In fact, 2017 started on a strong footing with home resales

in the area rising 18% year over year in the first quarter (from six-year

low levels in the same period a year ago).

0

2

4

6

8

10

12

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Long-term average

Monthly, S.A., Alberta

Months of inventory


0

1

2

3

4

5

6

7

8

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Long-term average

Rental vacancy rate


%, purpose-built apartment buildings of three units or more, Calgary


21

Calgary’s labour market has improved noticeably since the middle of

2016. Employment rose by a solid 3.2% in the past nine months and the

jobless rate has fallen by almost a full percentage point since November

to 9.3% in March.

The speed with which labour market conditions improved in the past

several months constituted, in effect, a ‘positive shock’ to the market,

thereby sharply tempering risks for the housing market.

With evidence of economic recovery springing across Alberta, Calgary’s

labour market is likely to continue to perk up during the remainder of

2017.

Demand fundamentals

CALGARY AREA

Supply fundamentals

The past deterioration in job prospects contributed significantly to a

slowdown in Calgary’s adult population growth—from a recent cyclical

high of 4.0% in early 2014 to a 23-year low of 1.5% in March 2017.

Calgary’s 2016 Civic Census showed a net migration loss in the 12

months ending April 2016 for only the second time in the past quarter

century.

Demographics-related risks have risen in the Calgary area.

That being said, evidence of a turnaround in Calgary’s labour market

bode well for reversing the recent deterioration in demographic trends.

-2

-1

1

2

3

4

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage points, Calgary



0.0

1.0

2.0

3.0

4.0

5.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Y/Y % change in the 15+ population, Calgary



0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average

Units per 1,000 population, Calgary, n.s.a.



There are few signs of overbuilding of single-detached homes in Calgary.

The number of unsold single-detached and semi-detached has trended

lower after 2000 and stabilized at historically low levels since early 2015

(on a per 1000 population basis).

Despite the turbulence in the resale market in the past two years, stabil-

ity of the unsold inventory has been achieved by drastic curtailment of

new single-family home construction. Single-family home starts plum-

meted by 36% in 2015 and again by 16% in 2016.

Such builder restraint substantially minimizes overbuilding risks in this

category.

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




The situation is quite different in the multi-unit segment where the num-

ber of unabsorbed units has surged since the spring of 2015 (when Calga-

ry arguably had a supply shortage) to record-high levels by late-2016 and

early-2017.

The stock of unsold units was driven higher by sharp increases in condo

apartment completions (up by 39% in 2015 and 8% in 2016) at a time

when demand turned cold.

The completed and unsold inventory rocketed passed the long-term aver-

age (on a per 1000 population basis) for the area and deep into the high

risk zone. There is strong evidence of surplus in this segment of the mar-

ket in Calgary, which may threaten the stability of this segment of the

market.


22

Supply fundamentals

CALGARY AREA

0

1

2

3

4

5

6

7

8

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




The dramatic scaling back of single-detached home starts contributed to

a steady decline in the number of units under construction since 2015 to

historically low levels.

Such subdued levels of construction pose minimal risks of destabilizing

the market.

0

2

4

6

8

10

12

14

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Long-term average




After reaching very high levels in 2014 and 2015, there has been a sharp

drop in the number of units under construction moderation on the multi-

unit side of the market in 2016. Much of the wave of condo starts in 2014

has now exited the construction ‘pipeline’.

Current levels therefore signal a return to a more subdued pace of condo

completions in the period ahead, which is good news considering the

state of oversupply at present in this segment of the market.

Sharp drops in condo apartment starts in 2015 (down 15%) and 2016

(down 36%) suggest that further moderation is likely ahead.

The material contained in this report is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, without express authoriza-tion of the copyright holder in writing. The statements and statistics contained herein have been prepared by RBC Economics Research based on information from

sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This publication is for the infor-

mation of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

®Registered trademark of Royal Bank of Canada.

©Royal Bank of Canada.

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