CANADIAN HOUSING HEALTH CHECK

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1 Largest four housing markets Toronto Elevated risks and vulnerabilities persist while the market transitions toward a cooler state in the wake of policy action. Prices are likely to decline m/m for a period of time. Sharp shifts in market psychology always raise the odds of overreaction. But slower home resale activity and increased supply of homes for sale have been positive developments. Montreal Upward momentum continued to build so far in 7. Sales are growing and inventories declining. Prices have picked up their pace but still within very reasonable range, although affordability is starting to become a little stretched. The market s risk profile is quite positive overall at this point. Vancouver Despite further improvements this year, extremely poor affordability is still a major vulnerability. Policy measures to address housing risks have contributed to cooling the market down, although the effect of these measures may be waning. The recent tightening of demand-supply conditions has dimmed the risk of a sharp price decline in the near term. Calgary Growing signs of an economic recovery have improved the risk profile. condo and rental inventories are still sources of concerns. The recent softening in oil prices also raises risks. A drop in condo construction and an improving trend for home resales have been positive developments. Craig Wright Chief Economist () craig.wright@rbc.com Robert Hogue Senior Economist robert.hogue@rbc.com CANADIAN HOUSING HEALTH CHECK Adjusting to policy measures in Ontario keeps near-term housing risks elevated in Canada July 7 Local housing risk indicators still show unusually high risks and vulnerabilities in Toronto and other southern Ontario markets but the recent easing of upward price pressure has been a positive development. Risk profiles in other markets generally continued to improve. Nation-wide, the probability of a steep and widespread housing downturn in Canada over the next months remains low, although it has increased slightly because of the potential for overreaction to policy action in Ontario and for further policy tightening. Housing policy: Reaction to Ontario s Fair Housing Plan announced on April has been swift. Home resales have dropped sharply and listings have surged in the Greater Toronto Area. The plan appears to be having some success at reining in price expectations for both buyers and sellers in the area, although the process of adjustment has yet to run its course fully. Tax on foreign buyers in Vancouver: The Vancouver market has adjusted in an orderly fashion to the 5% tax on home purchased by foreign nationals. Its dampening 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). Interest rates: Interest rate risks are still contained but have increased recently. The Bank of Canada raised its overnight rate by 5 basis points in early July and signaled that there may be more to come. The news sparked a run-up in bond yields. While we expect yields to drift higher, the odds of a spike in rates are low in the short term. Energy sector downturn: Oil prices renewed softness in recent months has turned the focus on this risk factor again in oil-producing provinces. Any further decline in oil prices could jeopardize the burgeoning recovery in Alberta s housing market. Unemployment: Labour market-related risks have generally continued to ease. In particular, there was notable improvement in Alberta where the unemployment rate has declines markedly from decade-high levels late last year. 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 Monitoring dashboard Canada Vancouver Calgary Toronto Montreal 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

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 Economics 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 trouble 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 historical 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), concerning (yellow) or dangerous (red). The width of each graphics represents the range of values posted by the indicator during the past years (or period of time available). The far left corresponds to the safest measure ever recorded and the far right, to the most extreme 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, historically, 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 represent 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 =.5% (. standard deviations above the long-term mean); and red at 5.% ( standard deviations above the mean). Sales-to-new listings ratio: yellow threshold =.; and red =.5. Months of inventory: yellow threshold = 7.; red = 8.5. Rental vacancy rate: yellow threshold =.% (long-term mean); and red =.7% (.5 standard deviations above the mean). Real 5-year bond yield relative to trailing -month average: yellow threshold = percentage point ( standard deviation above the mean); red =. percentage points ( standard deviations). Unemployment rate relative to trailing -month average: yellow threshold =. percentage points (. standard deviation above the mean); red =.9 percentage points (.5 standard deviations). Net immigration per, population: yellow threshold =.5 (.5 standard deviations above the mean); red = 5. (. standard deviations below the mean). Completed and unoccupied units per, population, singles and semis: yellow threshold =.9 (. standard deviations above the mean); red =. (. standard deviation above the mean). Completed and unoccupied units per, population, multiples: yellow threshold =. (the mean); red =.7 (.9 standard deviation above the mean). Housing under construction per, population, singles: yellow threshold =. (.5 standard deviations from the mean); red =. ( standard deviation from the mean). Housing under construction per, population, multiples: yellow threshold =.9 (.5 standard deviations from the mean); red =.58 ( 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 defined 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 Risk implications RBC affordability measure - aggregate Existing home market balance Sales-to-new listings ratio Months of inventory Rental vacancy rate Demand fundamentals Change in real 5-Year bond yields Change in the unemployment rate Net immigration rate Completed and unsold units per capita - singles and semis Completed and unosold units per capita - multiples Housing under construction per capita - singles Housing under construction per capita - multiples

4 CANADA Affordability RBC affordability measure - aggregate Ownership costs as % of household income, Canada Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage 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 measure (5.9% in Q 7) suggests the presence of greater-than-average market stress for buyers in Canada with the situation steadily deteriorating since the spring of 5. Affordability is most stretched for singledetached home in Canada s largest markets. Condo affordability (7.%) 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 5.% nationally Existing home market balance Sales-to-new listings ratio Monthly, S.A., Canada Source: RBC Economics Research, Canadian Real Estate Association Months of inventory Monthly, S.A., Canada Seller's market Balanced market Buyer's market Source: RBC Economics Research, Canadian Real Estate Association Rental vacancy rate %, total CMAs, purpose-built apartment buildings of three units or more, Canada Annual:988-; Semi-annual: -current Source: RBC Economics Research, CMHC 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., the market favours sellers and prices typically rise rapidly. When the ratio approaches, or is below., the market favours buyers and prices come under intense downward pressure. Anything in between is considered a balanced 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. Home resales dropped sharply in May and June, 7, in Canada after trending upwardly since. New listings rebounded strongly this spring after plummeting late last year. Extremely tight markets in Ontario earlier this year have rebalanced in recent months. Historically, the largest price declines occurred when the ratio fell below.5. 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. Nonetheless, based on what track record is available, we estimate that downward pressure on prices start to build at levels between 7. and 8.5 months, and that severe pressure emerges at levels exceeding 8.5. The sharp rebound in new listings this spring boosted the number of months inventory in Canada to 5. in June, just slightly below the longrun average of 5.. This level is consistent with continued price increases. Demand-supply balance indicators for the existing home market, therefore, continue to suggest little in the way of any imminent drop in prices in the national market. The rental vacancy rate has not correlated very closely with prices historically. However, we believe that the Canadian housing story will be very sensitive 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 closely. A main drawback of the vacancy rate as a monitoring tool is that it is published only once a year (in October) by CMHC. The latest data for October shows further marginal increase from.% in October 5 to.% at the national level, which slightly exceeds the long-term average (.%). The rise since primarily reflected large increases in Alberta and Saskatchewan. We would consider a vacancy rate above.5% as a sign of oversupply in the rental space.

5 CANADA Demand fundamentals Real 5-year bond yields relative to trailing -month average Percentage points, Canada Source: RBC Economics Research, Bank of Canada, Statistics Canada Unemployment rate relative to trailing -month average Percentage points, Canada Net immigration rate Trailing -quarter sum, Canada, per, population Surges in interest rates have been strongly associated with market downturns and price declines in several housing cycles in the past years in Canada. A basis-point rise relative to the trailing -month average would apply intense downward pressure on the market and a 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 in June to its highest level in months, although the yield is still low from a historical perspective. The real yield was up basis points from its - month trailing average in June, which posed some risk to the market. RBC s base case interest rate forecast calls for the overnight rate to rise by another 5 basis points in 7, followed by two additional hikes of similar size in 8. RBC expects longer-term rates to continue to drift modestly higher. This scenario would present only moderate risks to the housing market over the short term. Similarly, spikes of unemployment have been associated with housing downturns in the past years, although they have tended to lag price declines rather than lead them. We estimate that a.5 percentage point increase in Canada s unemployment rate relative to the trailing -month average would stress the market moderately, but that a full percentage-point surge would threaten its stability. The unemployment rate has trended downwardly since the beginning of and continued to do so in 7. It reached an eight-year low of.5% in April and June. The rate has been below its trailing -month average since May. 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 easing of such in Alberta so far in 7 with that province s unemployment rate dropping noticeably. 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, population) has surged since late-5, after falling between late and mid-5. After reaching a multi-decade high at the end of, the eased back somewhat to 8.9 in Q/7, still very comfortably above the.5 threshold signalling some degree of vulnerability. The rate is likely to remain elevated in light of the federal government maintaining a high target (K) for new permanent residents in the country in Completed and unsold units - singles and semis Units per, population, Canada, n.s.a 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 potential sources of trouble. On the single-family homes side, the stock of unsold units has dipped slightly since the summer of to. units per, population by May, thereby resuming a downward trend after stabilizing between mid- and mid-. 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.9 units and dangerous at. units. 5

6 CANADA Completed and unsold units - multiples Units per, population, Canada, n.s.a On the multi-unit dwellings side, market absorption has been solid throughout and early-7 amid slower completions compared to 5 (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. units per, population in May 7, down from a 9-year high of. units in May 5. The latest read of this indicator was slightly below the long-term average (.) and well below the threshold that would signal a high degree of excess. Overall, the inventory of completed but unsold condos evolved constructively in the past two years in Canada, thereby muting oversupply risks Housing under construction - singles Units per, population, Canada, n.s.a 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, 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. In some of Canada s largest markets, demand for single family homes significantly outstrips supply Housing under construction - multiples Units per, population, Canada, n.s.a On the multiples side, however, there are record-high levels of condo units under construction in Canada. There were. multi-unit dwellings per, population under construction in Q/7. Strictly speaking, this level is well into the high risk zone (. 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 (% of total) and Vancouver (9%) 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 Risk implications RBC affordability measure - aggregate Near-term: negative Existing home market balance Sales-to-new listings ratio Months of inventory - Ontario Rental vacancy rate Demand fundamentals Change in real 5-Year bond yields Change in the unemployment rate Population growth Completed and unsold units per capita - singles and semis Completed and unsold units per capita - multiples Housing under construction per capita - singles Housing under construction per capita - multiples 7

8 GREATER TORONTO AREA Affordability RBC affordability measure - aggregate Ownership costs as % of household income, Toronto Affordability in the GTA has been on a deteriorating trend since with the pace of deterioration accelerating since 5. 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 segment as well lately, with condo prices escalating rapidly in the past year. Stretched affordability may become a more pressing issue now that the Toronto-area market has started to cool. Sky-rocketing prices earlier this year posed 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. Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage Existing home market balance Sales-to-new listings ratio Monthly, S.A., Toronto Seller's market Balanced market... Buyer's market Source: RBC Economics Research, Canadian Real Estate Association Demand-supply conditions swung sharply in favour of buyers this spring after becoming extremely tight at the start of 7. From a -year high of.9 in January 7, the sales-to-new listings ratio plummeted to.9 by June, marginally below the. threshold marking conditions favouring buyers. Earlier tight market conditions fueled strong price increases for all types of housing and in all areas within (and outside) the GTA. The sudden swing in market conditions is signaling a significant easing in upward price pressure and raises the potential for a period of outright price declines. Indeed, the average price of homes sold on the MLS system has fallen by % between April and June. Benchmark prices, however, have softened by less than % in June. A moderate, controlled decline in prices should seen as a positive development that would bring some much needed affordability relief. Months of inventory Monthly, S.A., Ontario The easing of earlier demand-supply tightness is also apparent in the rise in inventories of homes for sales (active listings), which had plummeted 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.7 in June from its lowest point (.5 months in March 7) since records have been published by the Canadian Real Estate Association (). Separate data from the Toronto Real Estate Board shows that the number of months of inventory in the Toronto area was. in June 7, up from in March but still down from.5 a year earlier and. at the end of. Source: RBC Economics Research, Canadian Real Estate Association Rental vacancy rate %, purpose-built apartment buildings of three units or more, Toronto 5 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 to.% from.% a year earlier. Toronto Real Estate Board statistics showed that condo rental activity was strong Q/7 but flat relative to a year earlier due to a drop in the number of units listed for rent (down.%) which restrained supply. Average rent continued to rise at a brisk pace (by almost 9% 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 Source: RBC Economics Research, CMHC 8

9 GREATER TORONTO AREA Demand fundamentals Unemployment rate relative to trailing -month average Percentage points, Toronto Labour market conditions in the GTA continue to be generally supportive for the area s housing market. Toronto s unemployment rate remains on a seven-year long downtrend, easing to.7% in June which just shy of the eight-year low of.5% recorded in July. Labour market-related risks remain low at this point Adult population growth Y/Y % change in the 5+ population, Toronto Solid demographic fundamentals have long supported GTA s housing market. Those fundamentals improved since early, following a period of softening in -5. The rate of growth in adult population picked up from.% in mid-5 to.9% most recently, thereby matching GTA s long-term average. A rate below.5% would be a source of concern Completed and unsold units - singles and semis Units per, population, Toronto, n.s.a GTA home builders are responding to a dearth of single-family homes in the area, with single-starts rising % in both 5 and (from historically low levels in ). 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 Completed and unsold units - multiples Units per, population, Toronto, n.s.a.... 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 5 and stocks of unsold units have come down considerably. The unabsorbed inventory fell from a -year peak of.58 units per, population in May 5 to. units in May 7, which is well within the safe zone i.e., below the.7 threshold signalling the potential for mild excess supply

10 GREATER TORONTO AREA Housing under construction - singles Units per, population, Toronto, n.s.a Single-detached starts picked up in both 5 and, and boosted the number of such units under construction; still, the increase has not been excessive as the most recent level roughly equaled the long-term average for the area when measured in per, 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. Policy to reduce urban sprawl and favour higher density urban development contributed to a significant slowdown in single-detached home construction since the mid-s. Housing under construction - multiples Units per, population, Toronto, n.s.a 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, population basis, multi-unit construction remains in a high risk zone; however, the potential threat to the market is tempered by the healthier unsold condo inventory and very strong demand 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 increased supply quite handily.

11 GREATER MONTREAL AREA Affordability Risk implications RBC affordability measure - aggregate Existing home market balance Sales-to-new listings ratio Months of inventory - Quebec Rental vacancy rate Demand fundamentals Change in real 5-Year bond yields Change in the unemployment rate Population growth Completed and unsold units per capita - singles and semis Completed and unsold units per capita - multiples Housing under construction per capita - singles Housing under construction per capita - multiples Near-term: negative

12 GREATER MONTREAL AREA Affordability RBC affordability measure - aggregate Ownership costs as % of household income, Montreal Affordability deteriorated slightly in the Montreal area since early 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.% in Q/7, up. percentage points from a year ago and within a range consistent with moderate risk Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage Existing home market balance Sales-to-new listings ratio Monthly, S.A., Montreal.. Seller's market. Balanced market.. Buyer's market Demand-supply conditions in the Montreal area have tightened steadily since. The sales-to-new listings ratio continued to drift higher in and the first half of 7, reaching. in May, which was the highest point in seven years. Home resales were up by 8% in the second quarter of 7. 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 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. Source: RBC Economics Research, Canadian Real Estate Association Months of inventory Monthly, S.A., Quebec 8 Existing home supply expressed as number of months inventory shows a declining trend in Quebec since early 5 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 conditions in Montreal Source: RBC Economics Research, Canadian Real Estate Association Rental vacancy rate %, purpose-built apartment buildings of three units or more, Montreal long-term average A wave of condo completions in (+8%) increased competition for purpose-built apartment buildings, which has translated into higher rental vacancy rates in 5. The opposite then occurred, whereby a sharp drop in condo completions in 5 (-8%) contributed to a slight easing in the vacancy rate from.% in October 5 to.9% in October. Such a rate continues to signal some mild degree of oversupply in the rental market

13 GREATER MONTREAL AREA Demand fundamentals Unemployment rate relative to trailing -month average Percentage points, Montreal Montreal s job market has been very strong since mid-. The unemployment fell impressively by. percentage points in the past months. It stood at.5% in June, its lowest level in years. The drop offered further support for the housing market and therefore was a significantly positive development from a risk point of view Adult population growth Y/Y % change in the 5+ population, Montreal.. Following a two year-long period of easing growth, Montreal s adult population has grown at a faster rates since mid-5, and returned to its long-term average of % most recently. Overall demographics currently pose little risks for the market Completed and unsold units - singles and semis Units per, population, Montreal, n.s.a..9.7 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 Completed and unsold units - multiples Units per, population, Montreal, n.s.a..... On the multi-unit dwelling side, conditions improved noticeably since 5 with the stock of unabsorbed units declining markedly. The stock fell from.9 units per, population in August 5 to. units by May 7 marginally below the long-term average. This suggests that the earlier surplus of multi-unit dwellings has been largely resolved in the Montreal market

14 GREATER MONTREAL AREA Housing under construction - singles Units per, population, Montreal, n.s.a 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 longrun averages and well within the safe zone. Housing under construction - multiples Units per, population, Montreal, n.s.a A noticeable increase in multi-unit dwelling starts since mid- has pushed the number multi-unit dwellings under construction higher in the Montreal area in recent months. In per, population terms, that number rose from.9 in July to. in May 7, a new all-time high. 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 Risk implications RBC affordability measure - aggregate Near-term: negative Existing home market balance Sales-to-new listings ratio Months of inventory - BC Rental vacancy rate Demand fundamentals Change in real 5-Year bond yields Change in the unemployment rate Population growth Near-term: negative Completed and unsold units per capita - singles and semis Completed and unsold units per capita - multiples Housing under construction per capita - singles Housing under construction per capita - multiples 5

16 GREATER VANCOUVER AREA Affordability RBC affordability measure - aggregate Ownership costs as % of household income, Vancouver Despite some improvement at the end of and beginning of 7, extremely poor housing affordability continues to pose a major risk 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 79.7% in Q/7, 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 significant moderation in home resales in the area since a peak was reached in the winter of. Policy changes including the surprise implementation of a new tax on purchases made by foreign buyers last August also likely contributed significantly. Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage Existing home market balance Sales-to-new listings ratio Monthly, S.A., Vancouver.... Seller's market Balanced market Buyer's market 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. The sales-to-new listings ratio pushed back up into sellers market territory, reaching.5 in June 7. This level suggests the presence of upward pressure on prices. Prices have picked up slightly this spring. Provincial government statistics show that some (although not all) foreign buyers had returned to the area by the late stages of after moving to the sidelines following the introduction of the foreign buyer tax Source: RBC Economics Research, Canadian Real Estate Association Months of inventory Monthly, S.A., British Columbia 8 The firming of market conditions tightness in recent months is also visible at the provincial level where the inventory of homes available for sale measured in number of months of sale eased again in recent months after rising slightly last year. The inventory remains historically low. This indicator suggests the presence of upward price pressure in the province Source: RBC Economics Research, Canadian Real Estate Association Rental vacancy rate %, purpose-built apartment buildings of three units or more, Vancouver 5 While clear signs have emerged that demand-supply conditions are easing in the home ownership market, conditions remain very tight in Vancouver s rental market. The area s rental vacancy rate continued to decline in, reaching a eight-year low of.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 Source: RBC Economics Research, CMHC

17 GREATER VANCOUVER AREA Demand fundamentals Unemployment rate relative to trailing -month average Percentage points, Vancouver The job situation in Vancouver has been positive in and the first half of 7 with the jobless rate continuing to hover around the 5% mark. Labour market developments do not pose any immediate threat to the housing market. On the contrary, they offer substantial support currently Adult population growth Y/Y % change in the 5+ population, Vancouver Adult population growth has slowed in the past year from.9% y/y in March to.% in June 7. The rate of growth has dipped marginally below the threshold (.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 Completed and unsold units - singles and semis Units per, population, Vancouver, n.s.a Absorption of single-detached and semi-detached units has been quite strong since early, although there has been some modest easing lately. The number of recently completed and unsold units has risen moderately from. units per, population in May to. in May 7 still well into the safe zone and below the long-range average of. units. With singles and semi-detached completions now trending slightly downwardly, the Vancouver-area market shows few signs of being overbuilt at this point or becoming so in the near term Completed and unsold units - multiples Units per, population, Vancouver, n.s.a 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, reaching a nine-year low in August and staying flat since then. Moderate levels of apartment completions in and 5 limited the flow of new supply into the market, and declining completions over the latter half of and early-7 reinforced this trend this year. The Vancouver condo market does not appear to be overbuilt at this point

18 GREATER VANCOUVER AREA Housing under construction - singles Units per, population, Vancouver, n.s.a Builders response to the shortage of single-family homes in the Vancouver area became more vigorous in with starts rising by % from 5. The sharp slowing in resale activity for single-detached homes during the latter half of last year elicited a concomitant retrenchment in single-detached starts in the fourth quarter (down.% y/y) and first quarter of 7 (down 7% y/y). Nonetheless, strong starts prior to that point drove the number of units under construction its highest level in years in May. 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. Housing under construction - multiples Units per, population, Vancouver, n.s.a Fueled by very strong housing starts in, the number of multi-family units under construction (on a per 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 resale market and low inventories of newly built and unsold units

19 CALGARY AREA Affordability Risk implications RBC affordability measure - aggregate Existing home market balance Sales-to-new listings ratio Months of inventory - Alberta Rental vacancy rate Near-term: negative Demand fundamentals Change in real 5-Year bond yields Change in the unemployment rate Population growth Near-term: negative Completed and unsold units per capita - singles and semis Completed and unsold units per capita - multiples Near-term: negative Housing under construction per capita - singles Housing under construction per capita - multiples 9

20 CALGARY AREA Affordability RBC affordability measure - aggregate 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 the past year slightly under % for RBC s aggregate measure. Calgary still faces a number of tough issues; however, there is no evidence to suggest that affordability is one of them Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage Existing home market balance Sales-to-new listings ratio Monthly, S.A., Calgary. Seller's market. Balanced market. Buyer's market After weakening considerably in 5, demand-supply conditions improved in and the first half of 7 on the back of a slight recovery in home resales since spring last year (from a historically low base) and a reduction in new listings. The sales-to-new listings ratio which rose from. at the end of 5 to an average of.5 in the second quarter of 7 would suggest that the Calgary market is balanced; however, there continues to be a hefty inventory of active listings (.7 months worth of supply in the Calgary region 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. Despite a softening of activity late in the spring, home resales are up % above year ago levels in the first half of 7. Source: RBC Economics Research, Canadian Real Estate Association Months of inventory Monthly, S.A., Alberta 8 The overall inventory of homes for sale in Alberta rose again this spring after easing at the start of 7. The number of months inventory climbed to.5 in June after reaching a low of 5. in February. The latest reading suggest moderate risk for the market The Calgary Real Estate Board reported that active listings in the area were up by % in June relative to a year earlier; however, the average number of days it took a property to sell fell from 7 to 8 over the same interval. The recent uptick in active inventory, if sustained, may rekindle downward pressure on prices in the near term Source: RBC Economics Research, Canadian Real Estate Association Rental vacancy rate %, purpose-built apartment buildings of three units or more, Calgary Calgary s rental market appears to be over-supplied. The rental vacancy rate surged to a record high of 7.% in October, up from 5.% in October 5 and just.% 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.% and.% in depending on the size of the unit

21 CALGARY AREA Demand fundamentals Unemployment rate relative to trailing -month average Percentage points, Calgary Calgary s labour market has improved significantly since the middle of. Employment rose by a solid.9% over the months ending in June 7 and the jobless rate has fallen by. percentage points since November to 8.9% in June. 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 7 assuming that the recent soft patch in oil prices does not derail confidence. Adult population growth Y/Y % change in the 5+ population, Calgary Past deterioration in job prospects contributed significantly to a slowdown in Calgary s adult population growth from a recent cyclical high of.% in early to a -year low of.% in June 7. Calgary s 7 Civic Census showed a small increase in net migration following a net loss in for only the second time in the past quarter century. Total population growth remained weak at.9% in 7. 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 Completed and unsold units - singles and semis Units per, 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 and stabilized at historically low levels since early 5 (on a per population basis). Despite the turbulence in the resale market in the past three years, stability of the unsold inventory has been achieved by drastic curtailment of new single-family home construction. Single-family home starts plummeted by % in 5 and again by % in. Such builder restraint substantially minimizes overbuilding risks in this category Completed and unsold units - multiples Units per, population, Calgary, n.s.a The situation is quite different in the multi-unit segment where the number of unabsorbed units has surged since the spring of 5 (when Calgary arguably had a supply shortage) to record-high levels since late-. The stock of unsold units was driven higher by sharp increases in condo apartment completions (up by 9% in 5 and 8% in ) at a time when demand turned cold. The completed and unsold inventory rocketed past the long-term average (on a per population basis) for the area and deep into the high risk zone. There is strong evidence of surplus in this segment of the market in Calgary, which may threaten its stability.

22 CALGARY AREA Housing under construction - singles Units per, population, Calgary, n.s.a The dramatic scaling back of single-detached home starts contributed to a steady decline in the number of units under construction since 5 to historically low levels. Such subdued levels of construction pose minimal risks of destabilizing the market Housing under construction - multiples Units per, population, Calgary, n.s.a After reaching very high levels in and 5, there has been a sharp drop in the number of units under construction moderation on the multiunit side of the market in. Much of the wave of condo starts in 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 5 (down 5%) and (down %) 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 authorization 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 information 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.