CANADIAN HOUSING HEALTH CHECK April 2018

Transcription

1 Largest four housing markets Toronto Stretched affordability remains a significant vulnerability, especially in a rising interest rate environment. Recent mortgage policy changes generated some turbulence lately. Yet the market is healthier now than it was a year ago when it clearly overheated. It is now balanced, still well supported by economic and demographic fundamentals, and there are few signs of overbuilding. Current downward pressure on prices are likely to ease in the coming months. Montreal This market is on a roll and shows a generally positive risk/ vulnerability profile. Strength in the local economy contributed to boost housing demand and tighten demandsupply conditions. Prices are accelerating moderately. Gradual erosion of affordability is a factor worth monitoring closely. Vancouver Extremely poor affordability is the number one source of vulnerability. New market-cooling measures announced in the 8 BC budget as well as recently implemented mortgage stress test pose nearterm risks. Demand-supply conditions remain relatively tight, however, which tempers the risk of a material price decline in the near term. Calgary The market recovery process is uneven. The mortgage stress test generated substantial market volatility lately, raising near-term risks. condo inventories remain an issue, as is slower population growth. On a positive note, rising oil prices should boost sentiment and return the market on a upward trajectory. CANADIAN HOUSING HEALTH CHECK April 8 Stress test-generated volatility raises near-term housing market risks Nation-wide: The probability of a steep and widespread housing downturn over the next months is still low. The recently implemented stress test for uninsured mortgages raised that probability slightly, however. Local housing markets: Volatility generated by the new stress test eroded the nearterm risk profile of several major markets including Toronto, Vancouver and Calgary. Yet none of these markets appear to be at risk of an imminent severe downturn. Housing policy: Adjustment to the new stress test is fraught with uncertainty and could pose short-term challenges for housing markets across Canada. In British Columbia, new market-cooling measures announced in the 8 provincial budgets have added a new layer of policy adjustment risk. Longer term, the tightening of mortgage and housing policy will reduce risks. Affordability: The high cost of homeownership in Vancouver, Toronto and, to a lesser degree, Montreal represents a significant vulnerability for Canada s major markets. Interest rates: The prospect of higher interest rates remains a central risk factor though it took a backseat in the last couple of months as longer-term rates paused from their ascending trend. Indications that rates were inching higher again in mid- April, if sustained, would exacerbate affordability issues in some of Canada s major markets. Escalating prices in Canada s hot markets: There are been positive developments in Toronto where prices have moderated since mid-7. In Vancouver, though, prices have re-accelerated. Unemployment: Labour market-related risks eased significantly in Alberta and, to a lesser extent, Saskatchewan. The unemployment fell in both provinces over the course of 7. Labour market conditions are strong in the majority of other provinces and generally provide solid support for local housing markets. 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 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 Canada Vancouver Calgary Toronto Montreal Craig Wright Chief Economist craig.wright@rbc.com Robert Hogue Senior Economist robert.hogue@rbc.com

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 CANADIAN HOUSING HEALTH CHECK NOVEMBER 7 CANADA Affordability Risk implications RBC affordability measure - aggregate Existing home market balance Sales-to-new listings ratio Medium-term: neutral Months of inventory Medium-term: neutral 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 unsold units per capita - multiples Housing under construction per capita - singles Housing under construction per capita - multiples Near-term: neutral

4 CANADA Affordability RBC affordability measure - aggregate 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, affordability is a superior gauge in the current environment because it explicitly takes into account interest rates (the other measures don t), which have been and, in the near term, expected to remain historically low. The most recent reading of RBC s aggregate housing affordability measure (8.% 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 homes in Canada s largest markets, although condo affordability (.%) also has deteriorated significantly in the past year. We estimate the danger zone for the aggregate measure to be above 5.% nationally. 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., 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 5 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 generally tend to rise modestly. Canada-wide, the sales-to-new listings ratio settled within the range consistent with balanced market conditions during most of 7 after climbing into seller s market territory in. Home resales dropped sharply and new listings surged in the months that followed the introduction of Ontario s Fair Housing Plan in April 7. The national ratio spiked temporarily as markets rallied across the country late last year ahead of the new stress test on January though it has since returned to balance. Historically, the largest price declines occurred when the ratio fell below.5. The total inventory 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 published 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 rebound in new listings in Ontario since spring last year returned the number of months inventory in Canada back to its long-run average of 5. in February-March 8 from historically low levels a year ago. 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 large-scale 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 7 shows a drop to.7% at the national level from.% in, which is slightly below the long-term average (.%). The decline was widespread across the country. We would consider a vacancy rate above.5% as a sign of oversupply in the rental space. Annual:988-; Semi-annual: -current Source: RBC Economics Research, CMHC

5 CANADIAN HOUSING HEALTH CHECK NOVEMBER 7 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 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 stabilized in early 8 after climbing to its highest level in more than six years. The recent slowing meant that the real yield was up just 7 basis points above its -month trailing average in February, which no longer threatened to shock the housing market. RBC s base case interest rate forecast calls for the overnight rate to rise by another basis points by mid-9. RBC expects longer-term rates to move up in tandem with short-term rates. This scenario would present increasing risks to the housing market in the period ahead. 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 downward since the beginning of and continued to do so in early 8. It matched the lowest level since the mid-97s in Q/8. 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 an easing of such in Alberta with that province s unemployment rate coming down noticeably since early 7. Net immigration rate Trailing -quarter sum, Canada, per, population 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, and this continued to be the case by the late stages of 7. The rate reached a multi-decade high of. in the fourth quarter of 7, very comfortably above the.5 threshold signalling some degree of vulnerability. The rate is likely to remain elevated in light of the federal government boosting its target for new permanent residents from K in 7 to K in 8, and further to K in 9 and K 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 unsold inventory picked up slightly on a per, population basis since the middle of last year but, at. in February, remains historically low still well below the long-run average of.. There are no signs of any excess supply of new singledetached units in Canada at this stage. 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, 7 and early 8. This helped to draw down the unsold inventory markedly in Canada. The rate of unsold units eased to. units per, population in February 8, down from a 9-year high of. units in May 5. The latest read of this indicator was 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 and is no longer a source of concern Housing under construction - singles Units per, population, Canada, n.s.a There s been a lot of chatter in recent years about the number of housing units under construction in Canada. We remain unconcerned about overbuilding in the single family home segment, where levels remain well below historical averages (when measured on a per, population basis). In some of Canada s largest markets, demand for single family homes has outstripped supply significantly Housing under construction - multiples Units per, population, Canada, n.s.a On the multiples side, however, there are still record-high levels of condo units under construction in Canada. There were. multi-unit dwellings per, population under construction in Q/8. Strictly speaking, this level is well into the high risk zone (. units or higher). Yet in the context of tight demand-supply balances for condos in markets such Vancouver and Toronto, strong construction should be seen as being part of the solution to address affordability issues. Most of the units being built are in the Toronto (% of total) and Vancouver (8%) 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 degree of absorption risks over the medium term.

7 CANADIAN HOUSING HEALTH CHECK NOVEMBER 7 GREATER TORONTO AREA Affordability Risk implications RBC affordability measure - aggregate Existing home market balance Sales-to-new listings ratio Medium-term: neutral Months of inventory - Ontario Medium-term: neutral 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: neutral Medium-term: neutral 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 though this trend accelerated markedly since 5. RBC s measure is now in a zone that historically has been associated with a high risk of an ensuing negative outcome. The fact that RBC s measure improved slightly in Q/7 didn t really change the big picture. 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, with condo prices escalating rapidly in the past year. Stretched affordability is poised to become a more pressing issue now that interest rates have started to rise. The Toronto-area market is 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 Ontario s Fair Housing Plan in April 7 prompted buyers to move to the sidelines and sellers to list more properties for sale in the months that followed. This caused demand-supply conditions to snap back sharply into balance after heavily favouring sellers from 5 to early-7. Buyers and sellers had largely adjusted to the plan by the fall of 7. Then OSFI s announcement of a new stress test for uninsured mortgages effective January, 8, generated further market volatility. Downward pressures on prices continue to prevail at this stage. They are largely concentrated in the single-detached segment. The benchmark price rose month-to-month in both February and March 8, which could be a sign that prices will bottom out soon in the area. A moderate, controlled decline in prices should be seen as a positive development that will bring some much needed affordability relief. Source: RBC Economics Research, Canadian Real Estate Association 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 in early-7. Data available at the provincial level shows that the number of months inventory in Ontario rose to.9 in March 8 from its lowest point (.5 months) on record in March 7. The latest figure is still significantly lower than the long-run average of.7. Separate data from the Toronto Real Estate Board show that the number of months of inventory in the Toronto area was. in March 8, up from in March 7. 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. GTA s rental market has been very tight in recent years and the vacancy rate fell further to % by October 7 a -year low. Toronto Real Estate Board statistics showed that condo rental activity was strong historically in Q/8 but dropped 7.5% from a year ago. The decline in part reflected fewer units available for rent (down.8%). Average rent continued to rise at a brisk pace (by more than % 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 CANADIAN HOUSING HEALTH CHECK NOVEMBER 7 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 an eight-year long downtrend. It fell to its lowest point ever in March 8 (5.8%) in more than 7 years. Labour market-related risks are muted 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.% most recently, thereby exceeding GTA s long-term average of.9%. A rate below.5% would be a source of concern..5 Completed and unsold units - singles and semis Units per, population, Toronto, n.s.a...5. 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 Completed and unsold units - multiples Units per, population, Toronto, n.s.a.... Previously high inventory of recently completed and unsold condo units is no longer a concern in the Toronto area. Absorption of newly built condos has been brisk in the GTA since late 5 and the unsold inventory is now effectively entirely depleted. The unabsorbed inventory fell from a -year peak of.58 units per, population in May 5 to an all-time low of 5 units in February 8. This is well below the.7 threshold signalling the potential for mild excess supply.. 9

10 GREATER TORONTO AREA Housing under construction - singles Units per, population, Toronto, n.s.a. The number of single-detached units under construction in the GTA has been falling modestly since last spring as builders slowed down the pace of new starts following Ontario s Fair Housing Plan. The most recent level of single-unit construction activity was well below the long-term average for the area when measured in per, population terms. There are no signs of any impending single-unit supply glut at this stage. 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 compared to three years ago. 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 low level of unsold condo inventories and solid demand in the existing condo market. The main risk from high levels of construction is that many units could reach the completion stage in a short time span, thereby potentially creating absorption issues in the condo resale and/or rental markets. So far, both of these markets have absorbed the increased supply quite handily.

11 CANADIAN HOUSING HEALTH CHECK NOVEMBER 7 GREATER MONTREAL AREA Affordability Risk implications RBC affordability measure - aggregate Near-term: neutral Medium-term: neutral Existing home market balance Sales-to-new listings ratio Months of inventory - Quebec Near-term: neutral Medium-term: neutral 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: neutral

12 GREATER MONTREAL AREA Affordability RBC affordability measure - aggregate Ownership costs as % of household income, Montreal Affordability deteriorated gradually in the Montreal area since early 5 and this continued to be the case in 7. Still, affordability remains generally manageable 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 climbed to a multi-decade high of.7 in January 8 before easing to. in March. Home resales were up by 7% in the first quarter of 8. Robust sales activity took place amid a continued decline in the number of homes put up for sale each month, which resulted in a significant drawdown in inventories across all housing categories. The upward trend in the sales-to-new listings ratio suggests that the rate of price increases may strengthen in the period ahead, and doesn t 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 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 virtually back to its long-run average of 9. by March 8, and on the edge of the low risk zone. Local real estate board data show that the number of months inventory was relatively low at 5.9 in Q/8 for single-detached homes and at a balanced level of 8.9 for condos. These are signs of firming 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 The risk of oversupply in Montreal s rental market diminished significantly last year. The rental vacancy rate fell from.9% in October to a four-year low of.8% in October 7. This was in low-risk territory. That being said, a record-high, purpose-built rental units are under construction in the Montreal area. Completion of these units may put upward pressure on the vacancy rate in the coming years.

13 CANADIAN HOUSING HEALTH CHECK NOVEMBER 7 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 below % at the start of 8, its lowest point on records dating back to. The decline in Montreal s unemployment rate offers strong support for the housing market and therefore has been 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 rate since mid-5, marginally exceeding its long-term average of % most recently. Overall demographic conditions currently pose little risks for the market at this stage.. 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 unsold inventory declining markedly. The unsold inventory rose slightly late last year and early this year but, at. units per, population in February 8, it remains below the long-term average and within the low-risk zone...

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 construction are significantly below long-run averages and well within the safe zone. Housing under construction - multiples Units per, population, Montreal, n.s.a The number of multi-unit dwellings under construction climbed to a record high in the Montreal area at the start of 8. This in large part reflects a significant increase in purpose-built rental apartment projects. Condo units under construction also rose since mid-7 but remain below their peak reached between and. A potential risk of overbuilding multi-unit dwellings is present in Montreal. Yet strong construction activity of higher-density housing categories partly reflects a structural shift from single-detached toward multiples. This shift is supported by urban development policy and affordability advantage relative to single-family homes.

15 CANADIAN HOUSING HEALTH CHECK NOVEMBER 7 GREATER VANCOUVER AREA Affordability Risk implications RBC affordability measure - aggregate Existing home market balance Sales-to-new listings ratio Medium-term: neutral Months of inventory - BC 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 Near-term: neutral Medium-term: neutral Housing under construction per capita - multiples Near-term: neutral 5

16 GREATER VANCOUVER AREA Affordability RBC affordability measure - aggregate Ownership costs as % of household income, Vancouver Housing affordability remains extremely poor and represents 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 85.% in Q/7, RBC s aggregate affordability measure for the area was at its 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 5% foreign-buyer tax implemented in August, OSFI s new stress test and a slew of additional market-cooling measures announced in the 8 BC budget as well as rise in interest rates 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 Demand-supply conditions generally remain tight in the Vancouver area, though they ve eased somewhat in the last couple of years. After spending much of 7 into seller s market territory, the sales-tonew listings ratio has been volatile so far in 8 surging to.7 in January before dropping to balanced territory in February (.9) and March (.7). This volatility is testament to the state of flux in which the market finds itself at this juncture in light of the market-cooling measures introduced in the past few months. While the current balance in the market minimizes the odds of an imminent price decline, further loosening of demand-supply conditions cannot be ruled out in the near term. Source: RBC Economics Research, Canadian Real Estate Association Months of inventory Monthly, S.A., British Columbia 8 8 Some easing market conditions is also visible at the provincial level in recent months. The number of months inventory picked up slightly so far this year after remaining largely stable throughout 7. Still, the inventory remains historically low. This indicator is consistent with 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 Conditions remain very tight in Vancouver s rental market. The area s rental vacancy rate was.9% in October 7 among the lowest ones in the country up marginally from.7% in October. 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 CANADIAN HOUSING HEALTH CHECK NOVEMBER 7 GREATER VANCOUVER AREA Demand fundamentals Unemployment rate relative to trailing -month average Percentage points, Vancouver The job situation in Vancouver continues to be very positive with the jobless rate falling to its lowest level (.%) in years in March. 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 around.% since 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..5.5 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 in 8. The number of recently completed and unsold units has risen moderately from. units per, population in April to.5 in February 8 still well into the safe zone and below the long-range average of. units. 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. Historically-low inventories have persisted despite an increase in condo unit completions over the course of 7 and early 8. The Vancouver condo market does not appear to be overbuilt at this point..5 7

18 GREATER VANCOUVER AREA Housing under construction - singles Units per, population, Vancouver, n.s.a Builders responded to earlier strong demand for single-family homes in the Vancouver area, which has boosted the number of units under construction to the highest levels in years by the fall of 7. The cooling of demand for high-priced properties more recently led to a slight easing of single units under construction in early 8. On its own, a historically-high 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..5 Housing under construction - multiples Units per, population, Vancouver, n.s.a Fueled by very strong housing starts in and 7, the number of multi-family units under construction (on a per population basis) rose to a new record level, thereby signaling a greater-than-usual risk of imbalance in this market segment. Such risk is tempered by the tight market conditions in the condo resale market segment and low inventories of newly built and unsold units. 8

19 CANADIAN HOUSING HEALTH CHECK NOVEMBER 7 CALGARY AREA Affordability Risk implications RBC affordability measure - aggregate Existing home market balance Sales-to-new listings ratio Near-term: neutral Months of inventory - Alberta Medium-term: neutral 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: neutral Medium-term: neutral 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 market despite deteriorating slightly since early 5. RBC s aggregate measure for the area, at.% in Q/7, remains well within the safe zone. The Calgary market still faces a number of issues; however, affordability is unlikely to be 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 Source: RBC Economics Research, Canadian Real Estate Association Home resale activity surged late last year ahead of the new stress test for uninsured mortgages and then dropped significantly in the early months of 8. The post-stress test cooling contributed to loosen demand-supply conditions, though they remained balanced. The sales-to-new listings ratio eased from. in December 7 to. in February 8 within balanced market territory. A sharp increase in active listings (up 5% y/y in March, according to the Calgary Real Estate Board), however, suggests that the inventory of homes of sale has become more plentiful, especially for condo apartments. Price pressures continue to be largely muted at this juncture, although some downside risks persist primarily in the condo segment. Months of inventory Monthly, S.A., Alberta 8 The overall inventory of homes for sale in Alberta jumped in early 8. The number of months inventory surged to 7. in March from 5. in December. The latest reading points toward higher-than-usual risk for the market though the situation may be exaggerated somewhat by the volatility around the new stress test. If sustained, high levels of active listings relative to sales could rekindle downward pressure on prices 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 CANADIAN HOUSING HEALTH CHECK NOVEMBER 7 CALGARY AREA Demand fundamentals Unemployment rate relative to trailing -month average Percentage points, Calgary Calgary s labour market improved significantly since the middle of. Employment rose by a solid.8% over the months ending in March 8, and the jobless rate is down by almost percentage points since the peak in November to 8.% most recently. The improvement in labour market conditions has been a significant positive development for the area s housing market 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 September 7. Population has since picked up slightly to.% by March 8. While demographics-related risks remain high in the Calgary area, the labour market s strengthening in the past year bodes well for a further improvement in demographic trends. Completed and unsold units - singles and semis Units per, population, Calgary, n.s.a.... There are few signs of overbuilding in the single-detached segment in Calgary. The number of unsold single-detached and semi-detached remains historically low on a per population basis. There was a slight increase in the past year because single-family home starts partially rebounded after two years of dramatic declines.... Completed and unsold units - multiples Units per, population, Calgary, n.s.a..... The situation is very different in the multi-unit segment where the number of unabsorbed units surged since the spring of 5 (when Calgary arguably had a supply shortage) to record-high levels throughout most of 7 and early 8. The stock of unsold units was driven higher by sharp increases in condo apartment completions in 5 and 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 Calgary market.

22 CALGARY AREA Housing under construction - singles Units per, population, Calgary, n.s.a A partial rebound in starts last year boosted the unsold single-detached inventory slightly though the latter still poses minimal risks of destabilizing the market. The scaling back of single-detached home starts in 5 and contributed to a significant decline in the number of units under construction to historically low levels. Housing under construction - multiples Units per, population, Calgary, n.s.a. 8 The risks associated with current levels of multi-unit dwelling construction are contained. These risks, in fact, diminished very slightly so far this year. This marked a significant change from two to three years ago when the number of multi-unit dwelling construction reached very high levels following the starts of several condo projects initiated during boom in and. The wave of condo units started in has now exited the construction pipeline. 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.