November 2017...1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013...

CANADIAN HOUSING HEALTH CHECK

Interest rate increases and reaction to policy measures top

near-term housing market risks in Canada

Local housing market risks and vulnerabilities eased somewhat in Toronto and

other southern Ontario markets in recent months but increased modestly in Vancouver

and Calgary. These markets continue to be the higher-risk spots in Canada.

Nation-wide, the probability of a steep and widespread housing downturn over the

next 12 months remains low. The prospect of higher interest rates and the effect of

additional mortgage rule tightening that will kick in January1, 2018, have raised that

probability, however.

Interest rates: Back-to-back hikes by the Bank of Canada in July and September

suggested that a multi-year hiking cycle may be underway. This sparked a run-up in

bond yields and material increase in mortgage rates. The extent to which rates have

risen to date pose a moderate risk to the housing market. Any further rate increases,

however, could exacerbate affordability issues in some of Canada’s major markets.

Housing policy: So far, recent housing policy moves—including those addressing

specific risks in Vancouver and southern Ontario—have had constructive outcomes.

It’s uncertain whether markets will weather the next round of policy tightening—

more stringent qualifying rules for uninsured mortgages coming into effect in January

2018—as well. The cumulative effects of several rounds of housing policy tightening

could pose short-term challenges for housing markets across Canada. Longer term,

the series of housing policy tightening will reduce risks.

Escalating prices in Canada’s hot markets: Toronto resales cooled significantly

since April and price increases have slowed materially as a result. This should lead to

some affordability reprieve shortly provided household incomes continue to grow. In

Vancouver, however, prices re-accelerated this summer.

Energy sector downturn: Mild strengthening in oil prices since July should be posi-

tive for confidence and housing markets in oil-producing provinces.

Unemployment: Labour market-related risks generally continued to ease in 2017.

This wasn’t the case in Alberta and Saskatchewan, though, where unemployment rose

mid-year. Nonetheless, we expect this setback to be temporary as economic recover-

ies continue to unfold in these two provinces.

November 2017

Largest four housing markets

Toronto — Stretched affordability

continues to be a significant vulnera-

bility issue. But housing market risks

diminished somewhat in light of grow-

ing evidence that the market is adjust-

ing constructively to recent policy

action. Downward pressure on prices

may soon ease. Slower home resale

activity and increased supply of homes

for sale have been positive develop-

ments.

Montreal — This has been a good year

for the Montreal market and the risk/

vulnerability profile generally im-

proved. Healthy market fundamentals

support moderate price increases. The

odds of a sharp downturn are low.

Gradual erosion of affordability is a

factor worth monitoring closely.

Vancouver — Extremely poor afforda-

bility is still a major vulnerability. The

cooling effects of recent policy

measures have largely run their

course. Demand-supply conditions

tightened up again, which tempers the

risk of a sharp price decline in the

near term.

Calgary — A soft patch in activity par-

tially stalled the market recovery pro-

cess since spring. Downside risks have

re-emerged, especially in the condo

segment where excessive unsold in-

ventories remain. A recent pick-up in

oil prices, however, is poised to boost

confidence and put the market recov-

ery back on track.

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 | NOVEMBER 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: negative

Medium-term: negative

Existing home market balance

Near-term: positive

Medium-term: neutral

Near-term: positive


Near-term: positive

Medium-term: positive

Demand fundamentals

Near-term: negative


Near-term: positive


Near-term: positive


Supply fundamentals

Near-term: positive


Near-term: positive


Near-term: positive


Near-term: neutral


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

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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 (46.7% in Q2 2017) 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, although condo affordabil-

ity (39.0%) also has deteriorated significantly in the past year.

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

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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 fell back within the range

consistent with balanced market conditions after climbing into seller’s

market territory in 2016. Home resales dropped sharply and new listings

surged in the months that followed the introduction of Ontario’s Fair

Housing Plan in April. Activity picked up in August and September,

however. Market conditions have stabilized in recent months.

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 sharp rebound in new listings since spring boosted the number of

months’ inventory in Canada to 5.0 by September, just slightly below the

long-run average of 5.3. 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

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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 since

May to its highest level in almost four years in September. The real yield

was up 104 basis points from its 12-month trailing average in September,

which posed some risk to the market.

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

by another 25 basis points in 2017, followed by three additional hikes of

similar sizes in 2018. RBC expects longer-term rates to move up in tan-

dem with short-term rates. This scenario would present increasing risks

to the housing market in the period ahead.

-2

-1

1

2

3

4

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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 and continued to do so in 2017. It reached an nine-year low of 6.2%

in August and September. The rate has been below its trailing 12-month

average since May 2016.

Labour market conditions pose little risk nationally at this point. Some

areas of the country show a higher degree of risk; however, there has

been an easing of such in Alberta so far in 2017 with that province’s

unemployment rate trending lower.

1

2

3

4

5

6

7

8

9

10

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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.

After reaching a multi-decade high at the end of 2016, it eased back some-

what to 9.1 in Q2/17, still very comfortably above the 6.5 threshold signal-

ling 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 2018.

0.0

0.1

0.2

0.3

0.4

0.5

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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 trended

downwardly on a per 1,000 population basis since 2013, reaching 0.21 by

September. This was well below the long-run average of 0.26. There’s

still 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

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average


Completed and unsold units - multiples


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

throughout 2016 and 2017. This helped to draw down the inventory of

unsold units in Canada. The rate of unsold units eased to 0.27 units per

1,000 population in August 2017, down from a 19-year high of 0.41 units

in May 2015.

The latest read of this indicator was 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 two years in Canada, thereby muting oversupply risks.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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).

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

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average


Housing under construction - multiples


On the multiples side, however, there are still record-high levels of condo

units under construction in Canada.

There were 6.0 multi-unit dwellings per 1,000 population under construc-

tion in Q2/17.

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

higher). Yet in the context of tight demand-supply balances in markets

such Vancouver and, until recently Toronto, 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 (31% of total) and Van-

couver (19%) 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: negative


Near-term: positive


Near-term: positive


Supply fundamentals

Near-term: positive


Near-term: positive


Near-term: positive


Near-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, with condo prices escalating rapidly in the past year.

Stretched affordability is poised to become a more pressing issue now

that buyers are taking a more sober view of the market and interest rates

have started to rise.

The Toronto-area market is more sensitive to a substantial rise in inter-

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

The introduction of Ontario’s Fair Housing Plan in April prompted

buyers to move to the sidelines and sellers to list more units on the mar-

ket this spring. This caused demand-supply conditions to swing sharply

in favour of buyers this spring after heavily favouring sellers at the start

of 2017.

Both buyers and sellers appear to have largely adjusted to the plan more

recently and the market has become more balanced with the sales-to-new

listings ratio rising to 0.46 in September.

Downward pressure on prices has yet to let up entirely, however. Bench-

mark prices remained on a declining course on a month-over-month

basis as of September 2017.

A moderate, controlled decline in prices should be seen as a positive de-

velopment that will bring some much needed affordability relief.

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


The easing of earlier demand-supply tightness is also apparent in the rise

in inventories of homes for sales (active listings), which had fallen to

historically low levels at the start of this year.

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

of months’ inventory in Ontario rose to 2.8 in September from 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 1.5 in September

2017, up from 1.0 in March but still down from 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

was strong historically in Q3/2017 but down 4.7% from the level a year

ago. The decline in part reflected fewer units available for rent (down

3.9%). Average rent continued to rise at a brisk pace (by more than 11%

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

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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.

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

easing to 6.1% in September—a 16-year low for the area.

Labour market-related risks remain muted at this point.

Demand fundamentals


Supply fundamentals

-2

-1

1

2

3

4

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percentage points, Toronto



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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 2.0% most recently, thereby marginally exceeding GTA’s long-term

average.

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

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

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

There are no indications 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 the stock of unsold units is now almost entirely depleted.

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

1,000 population in May 2015 to an all-time low of 0.06 units in August

and September 2017. This is well 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

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




Single-detached starts picked up since 2015, boosting the number of such

units under construction. Yet the increase has not been excessive. The

most recent level in September was slightly below 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.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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 still-strong de-

mand in the existing condo market.

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

reach the completion stage at once, thereby flooding the condo resale

and/or rental markets. So far, both of these markets have absorbed the

increased supply quite handily.


11

GREATER MONTREAL AREA

Affordability

Near-term: neutral



Near-term: positive


Near-term: neutral


Near-term: neutral


Demand fundamentals

Near-term: negative


Near-term: positive


Near-term: positive


Supply fundamentals

Near-term: positive


Near-term: positive


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



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


12

Affordability



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

declining trend in Quebec since early 2015 from elevated levels. This

metric was at the edge of the mild-risk zone in June.

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

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average



Ownership costs as % of household income, Montreal

Affordability deteriorated slightly in the Montreal area since early

2015—although the situation stabilized this year. Still, affordability does

not pose any unusual degree if stress for buyers at this point.

RBC’s aggregate measure was 41.5% in Q2/17, up 0.8 percentage points

from a year ago and within a range consistent with moderate risk.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Monthly, S.A.



Monthly, S.A., Montreal


Buyer's market

Balanced market

Seller's market

Demand-supply conditions in the Montreal area have tightened steadily

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

2017, reaching 0.64 in September, which was close to the highest point in

seven years.

Home resales were up by 9% in the third quarter of 2017. Robust sales

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

out for sale each month, which resulted in a significant drawdown in

inventories, especially in the single-detached segment. Condo invento-

ries—which had been a significant issue earlier—also fell.

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 1.0 percentage points in the past 12

months. It stood at 6.5% in September, still near the lowest level in 10

years.

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 a 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

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percentage points, Montreal



0.0

0.4

0.8

1.2

1.6

2.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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 0.54 units by

September 2017—below the long-term average.

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

largely depleted 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

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




The number of multi-unit dwellings under construction remains histori-

cally elevated and still poses a potential risk of overbuilding.

However, there has been some improvement in recent months. In per

1,000 population terms, the number fell from 6.2 in April 2017 to 5.6 in

September.

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: negative


Near-term: positive


Near-term: negative


Supply fundamentals

Near-term: positive


Near-term: positive


Near-term: neutral


Near-term: neutral


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


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



16

Affordability



The firming of market conditions in recent months is also visible at the

provincial level where the inventory of homes available for sale measured

in number of months of sales eased this year after rising slightly last year.

The inventory remains historically low.

This indicator also is consistent with the presence of upward price pres-

sure in the province.

Conditions remain very tight in Vancouver’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

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average



Ownership costs as % of household income, Vancouver

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Monthly, S.A.



Monthly, S.A., Vancouver


Buyer's market

Balanced market

Seller's market

Despite some improvement at the end of 2016 and beginning of 2017,

extremely poor housing affordability continues to represent a major

vulnerability for the Vancouver-area market.

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

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

At 80.7% in Q2/2017, RBC’s aggregate affordability measure for the

area remained close to the worst level on record.

Poor affordability is likely among the factors that contributed to a signif-

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

the winter of 2016. Policy changes—including the surprise implementa-

tion of a new tax on purchases made by foreign buyers in August 2016—

also likely contributed significantly.

After easing during a brief period last fall, demand-supply conditions in

the Vancouver area firmed up again this year—although nowhere close

to the degree of tightness that prevailed in early 2016.

The sales-to-new listings ratio pushed back up into sellers’ market terri-

tory, reaching 0.68 in September 2017. This level suggests the presence of

upward pressure on prices.

Indeed, prices have picked up since winter. The annual rate of price

increase is now back into (low) double-digits.

The odds of a price decline in the short term are vert low at this stage.

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 continues to be positive this year with the

jobless rate falling to its lowest level (4.5%) in nine years in September.

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% since June 2017. The rate of growth has dipped

marginally 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

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percentage points, Vancouver



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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 this

year. The number of recently completed and unsold units has risen mod-

erately from 0.31 units per 1,000 population in April 2016 to 0.49 in Au-

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

age of 0.60 units.

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

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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.

Historically low inventories have persisted despite an increase in condo

unit completions this year.

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

point.

-2

-1

1

2

3

4

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percentage points, Vancouver



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average





18

Supply fundamentals


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




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

ver area in recent years have boosted the number of units under con-

struction to the highest levels in 23 years.

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, still-low inventories of unsold single-detached homes

helps to mitigate that risk.

Fueled by very strong housing starts in 2016 and early 2017, the number

of multi-family units under construction (on a per 1000 population basis)

rose to a new record level in recent months, thereby signaling a greater-

than-usual risk of imbalance in this market segment.

Such risk is tempered by the tight market conditions in the condo resale

market segment and low inventories of newly built and unsold units.


19

CALGARY AREA

Affordability

Near-term: positive



Near-term: neutral


Near-term: negative


Near-term: negative


Demand fundamentals

Near-term: negative


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 rose mid-year after

easing at the start of 2017. The number of months’ inventory climbed to

6.4 by September. This was up from a low of 5.2 in February. The latest

reading suggest moderate risk for the market

If sustained, the levels of active inventory could well rekindle downward

pressure on prices.

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

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average



Ownership costs as % of household income, Calgary

Housing affordability continues to be a generally constructive factor for

the Calgary market, remaining quite stable in the past year slightly un-

der 40% for RBC’s aggregate measure for the area.

Calgary still faces a number of 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

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Monthly, S.A.



Monthly, S.A., Calgary


Buyer's market

Balanced market

Seller's market

Home resale activity hit a soft patch this spring, which contributed to

erode demand-supply conditions modestly.

The sales-to-new listings ratio eased to 0.50 in the third quarter—in the

middle of balanced market territory. A sharp increase in active listings

(up 17% y/y in September, according to the Calgary Real Estate Board),

however, suggests that there continues to be a hefty inventory of homes

of sale (4.7 months’ worth of supply in the city of Calgary), especially for

condo apartments.

Price pressures continue to be largely muted at this juncture, although

some downside risks persist—primarily in the condo segment.

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 improved significantly since the middle of 2016.

Employment rose by a solid 3.9% over the 12 months ending in Septem-

ber 2017 and the jobless rate has fallen by 1.7 percentage points since

November 2016 to 8.5% in September.

The extent to which labour market conditions improved was a significant

positive development for the area’s housing market.

Demand fundamentals

CALGARY AREA

Supply fundamentals

Past deterioration in job prospects contributed significantly to a slow-

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

of 4.0% in early 2014 to a 23-year low of 1.4% in September 2017.

Calgary’s 2017 Civic Census showed a small increase in net migration

following a net loss in 2016 for only the second time in the past quarter

century. Total population growth remained weak at 0.9% in 2017.

Demographics-related risks have risen in the Calgary area this year.

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

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Percentage points, Calgary



0.0

1.0

2.0

3.0

4.0

5.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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 remains his-

torically low on a per 1000 population basis.

There was a slight increase this year because single-family home starts

partially rebounded after two years of dramatic declines (-36% in 2015

and –16% in 2015).

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Long-term average




The situation is very 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 since late-2016.

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 past the long-term average

(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 Calgary mar-

ket.


22

Supply fundamentals

CALGARY AREA

0

1

2

3

4

5

6

7

8

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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.

A rebound in starts this year boosted the unsold inventory slightly but

this still poses minimal risks of destabilizing the market.

0

2

4

6

8

10

12

14

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

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’.

A small increase this year reflects stronger starts of semi-detached and

townhouses—both more affordable alternatives to single-detached

homes.

Current levels construction activity signal slightly higher-than-usual

risks.

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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