Intense Activity Continues in QuebecThe resale market continues to surprise thanks to its strength since early 2018. Not only did Quebec avoid the adjustment period that impacted Ontario (graphs 1 and 2), but its cruising speed is also one of the highest of all the Canadian provinces. The 2.5% monthly gain in sales in September is out of step with the many declines recorded elsewhere in the country. The result for the first nine months of the year is also enviable: a 4.5% hike in the number of transactions handled by a real estate broker compared with the same period in 2017. Quebec is therefore on its way to achieving a new high at approximately 86,000 sales this year.
The increase in prices is also maintained. The hike over one year hit 7.8% in September, a clear increase compared to previous months. The average selling price reached $317,173 in September. The increase for the entire year will be roughly 5%. The growth in prices was faster in Montreal than in Quebec, but almost all of the regions throughout the province have experienced this upward trend since the beginning of 2018.1
There is nothing special about this bull cycle. In the early 2000s, prices jumped more than 10% over three consecutive years before stabilizing between 5% and 10% for the rest of the
The Resale Market Is Heating Up in Quebec While Ontario’s Is Recovering from Its Cooling Off
ECONOMIC STUDIES | NOVEMBER 1ST, 2018
The residential sector in Quebec and Ontario has followed two distinct paths since early 2018. On the one hand, existing property sales and prices accelerated in Quebec despite tighter federal rules regarding new mortgages and rising interest rates. On the other hand, Ontario, in particular the Greater Toronto Area, was seriously affected due to overvalued prices, making this market more vulnerable to a correction. Home sales and prices have recovered slightly in Ontario since the summer. The ongoing rise in interest rates in Canada is expected to cool the resale and new construction markets in both provinces in the coming quarters.
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1 Quebec’s Strong Pace Continues, While Ontario Is Recovering,Desjardins, Economic Studies, Spotlight on Housing, August 21th, 2018, 4 p.
In $k
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2016 2017 2018
Quebec (left) Ontario (right)
Four-month moving averages
Sources: Canadian Real Estate Association and Desjardins, Economic Studies
GRAPH 2Prices continue to rise in Quebec and have risen slightlyin Ontario
Average prices
In $k
GRAPH 1Property sales continue to rise in Quebec, but remain fairly low in Ontario
Sources: Canadian Real Estate Association and Desjardins, Economic Studies
decade (graph 3). At that time, Quebec was still catching up following the sluggishness of the 1990s. The current growth cycle of the resale market began in 2015 in the province, and recent developments are not worrisome except in Montreal, where the market is on the brink of overheating.
Less Pressure in TorontoTighter mortgage rules introduced by the federal government in January 2018 and rising interest rates have weakened the resale market in Ontario. Toronto and the neighbouring areas were hit the hardest. The level of overvaluation and the concentration of expensive single-family homes contributed to the drop in prices. The decline in activity even helped the Toronto market to stop overheating (graph 4); this corresponds to a sales-to-new-listings ratio of more than 70%. Overheating occurs when demand for housing is much too high in relation to the pool of new properties on the market, thereby leading to a rapid increase in prices. The pressure then dropped a notch in Toronto as balance was restored.
Elsewhere in the province, some markets continued to grow, in particular, the Ottawa market. Sales and average price have and risen approximately 3% since the beginning of the year. Demand
continues to climb faster than the number of properties for sale, such that the market is on the brink of overheating (graph 5). The situation in Vancouver is almost as strained, as the level of sales remains elevated compared to the number of new properties for sale.
According to the Canada Mortgage and Housing Corporation (CMHC), the level of price overvaluation remains low in Ottawa.2 A market is overvalued when prices rise far too quickly compared to fundamental factors such as household disposable income, interest rates, and population growth. The degree of overvalue is still elevated in Vancouver.
Montreal Crosses the Threshold for OverheatingAmong the major urban centres in the country, the Montreal metropolitan area is now the market showing the most strain. Sales are climbing rapidly while the number of properties available on the market continues to drop. The position of strength of sellers in terms of imposing their conditions has only grown. In addition, instances of bidding have multiplied recently. Indeed, the selling price exceeds the asking price in roughly 10% of all cases involving single-family dwellings, and in nearly 8% of condominium sales in Montreal.3 This phenomenon is also occurring more often elsewhere in the province, but is more widespread in Montreal (graph 6 on page 3). Tighter market conditions, which favour sellers during negotiations, motivate buyers to raise their offer. In September, the annual change in the average price hit 8.2%, with levels reaching nearly $400,000 in Greater Montreal. In many of the municipalities on the West Island, bidding wars affect 20–30% of the sales of single-family homes. In principle, sellers will adapt by demanding a higher price from the start, thereby limiting the number of bidding wars.
2 Housing Market Assessment, Canada, Canada Mortgage and Housing Corporation, Fourth Quarter 2018, 10 p.
3 A Growing Number of Properties Are Selling Above the Asking Price, Québec Federation of Real Estate Boards, A Word from the Economist, May 2018, 6 p.
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2008 2010 2012 2014 2016 2018Montreal Toronto
Four-month moving averages
Sources: Canadian Real Estate Association, Québec Federation of Real Estate Boards via the Centris® system and Desjardins, Economic Studies
Sales-to-new-listings ratio
GRAPH 4The Montreal market has just reached the point of overheating while Toronto has cooled
Overheating threshold
GRAPH 5Among the major resale markets in Canada, Montreal and Ottawa are now the closest
* Data for September 2018.Sources: Canadian Real Estate Association, Québec Federation of Real Estate Boards via the Centris® system and Desjardins, Economic Studies
Sales-to-new-listings ratio* In %
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Calgary Montreal Ottawa Toronto Vancouver
Overheating threshold
GRAPH 3There is nothing special about the current period of growth in property prices in Quebec
* Data for 2018 are from January to September.Sources: Québec Federation of Real Estate Boards via the Centris® systemand Desjardins, Economic Studies
Foreign Buyers: Slower GrowthThe strong demand for properties in Montreal is primarily due to the keen interest of local residents. There are more foreign buyers, but the rate has slowed considerably over the last three years. The number of American and French buyers is dropping, while the number of Chinese buyers is continuing to climb, and China now tops the list of all the countries (table 1). According to the CMHC, Chinese buyers concluded 207 transactions between January and August 2018, and 30% of them purchased a single-family dwelling, mainly on Montreal’s West Island.4 During this time, 688 dwellings were purchased by Canadian non-residents according to the CMHC, for 1.5% of total transactions. However, most of the purchases made by foreigners were condominiums in downtown Montreal, representing 12% of this market.
Interest Rates Are Rising On October 24, the Bank of Canada (BoC) once again raised its key rate by 25 basis points to 1.75%. This is the fifth hike since the summer of 2017. Given that the Canadian economy is operating at full capacity and that the new United States-Mexico-Canada Agreement (USMCA) has reduced the uncertainty concerning investment and exports, the BoC must tighten the screws to prevent the possibility of the economy overheating. It should continue to increase its key rate to reach a neutral level set at between 2.5% and 3.5%. The next hike is expected in January 2019. Despite its firm intention to raise rates even higher, the BoC will take into consideration high household debt levels and developments related to trade policies to determine how quickly to raise rates in the future.
With the increases in key rates, as well as those anticipated in the months to come, new hikes in bond yields are expected in Canada and the United States. The major Canadian financial institutions are expected to follow this trend by raising their retail rates. The currently posted mortgage rate of 5.54% for a five‑year term could reach between 5.65% and 6.25% at the end of 2019. The increase will be felt as borrowers renew their fixed‑rate mortgages, depending on the maturity date. For variable-rate loans, the rate will increase 25 basis points automatically with each decision by the BoC, which has been the case since the summer of 2017.
Moderation in SightEven if the resale market is running at full speed in Quebec due to a strong economy and labour market, the continued rise in interest rates is expected to slow down demand starting next year. The pace is expected to slow for existing properties and new construction (table 2 on page 4). Prices will increase more slowly in 2019, i.e., between 2.0% and 2.5%. The Montreal market is expected to step back from the brink of overheating and gradually become more balanced. In Ontario, the partial recovery in sales since the summer should allow for some temporary relief and help to avoid a new period of overheating. New construction dropped significantly in both provinces in the third quarter, which may signal the beginning of a downward trend for residential construction starts.
Hélène Bégin, Senior Economist
4 Housing Market Insight, Montreal CMA, Canada Mortgage and Housing Corporation, October 2018, 12 p.
GRAPH 6Bidding wars affect major centres in Quebec
CMA: Census Metropolitan Area* No data available for condominium in Trois-Rivières and Saguenay.Sources: Québec Federation of Real Estate Boards via the Centris® systemand Desjardins, Economic Studies
Proportion according to CMA
In %
23456789
1011
Montreal Quebec Gatineau Sherbrooke Trois-Rivières* Saguenay*
Single-family home Condominium
TABLE 1Residential property purchases made by foreign buyers in the Montreal CMA
CMA: Census Metropolitan AreaSources: Canada Mortgage and Housing Corporation and Desjardins, Economic Studies
f: forecasts; 1 Urban centres with populations of 10,000 and over, the total is slightly below the total for provincial apartments shown above; 2 Included in rental units; 3 Three units or more,
biannual survey of the fall; 4 Maintenance and repair expenditures are excluded.Sources: Canada Mortgage and Housing Corporation, Canadian Real Estate Association, Quebec Federation of Real Estate Boards, Statistics Canada and Desjardins, Economic Studies
