GLOBAL ECONOMICS GLOBAL REAL ESTATE TRENDS

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1 May, 1 Montreal Housing Outlook CONTACTS Montreal has so far bucked the cooling trend seen in most regional housing markets. Strong job creation and increased in-migration are supporting sales, while inventory shortages are pressuring prices. Overall sales this year are on track to surpass 7 s record high, while average prices are likely to face further moderate upward pressure. Strong housing demand has boosted the pace of new construction to its highest level in at least two decades, led by purpose-built rentals and condominiums. Yet there is little evidence of overbuilding, with unsold new home inventory in line with long-term trends. Montreal households, along with other CMAs in Quebec, continue to have a higher propensity to rent than those in other regions of the country, encouraged by an affordable and diverse rental stock. However, the homeownership gap between Quebec s CMAs and the rest of Canada has narrowed substantially in recent decades. Marc Desormeaux 1..7 Scotiabank Economics marc.desormeaux@scotiabank.com Adrienne Warren 1..1 Scotiabank Economics adrienne.warren@scotiabank.com Chart 1 Montreal Home Sales s of units, annualized -month moving average STRONG MOMENTUM CONTINUES Montreal s housing market is enjoying a resurgence at a time when activity in other major centres in Canada has either cooled sharply (e.g. Greater Vancouver and Greater Toronto) or remains sluggish (e.g. Calgary and Edmonton). Montreal home sales have been increasing steadily since 1, with full-year 17 transaction volumes up % to their second highest level on record. Sales have continued to trend higher in early 1, despite the tighter macroprudential rules in place since January, and the gradual upward drift in mortgage rates, putting them on pace to surpass 7 s record high. Montreal, alongside Ottawa, is among the few large urban markets in Canada where sales are higher than a year ago and are above their long-term average (chart 1). High-end detached and condominium properties are leading overall sales gains, indicative of strong demand from move-up buyers. These move-up buyers in turn free up entry-level and lower-priced homes for first-time buyers. First-time buyers will get an added assist from a new non-refundable tax credit unveiled in the March 1 provincial budget. Home prices have climbed to record highs, as listings fail to keep pace with the strength in demand. The MLS benchmark house price (HPI) for Greater Montreal rose.% in the year to April, recording its fastest twelve-month appreciation since 11. Prices are rising across market segments, including for single-family homes (+.% y/y), townhomes (+.7% y/y) and condominiums (+.% y/y). We expect further upward pressure on prices this year, given tight demand-supply conditions. The ratio of sales to new listings remains firmly in sellers territory at 7. in April more than one standard deviation above its long-term trend (chart ). Market conditions have tightened across all property categories. 1-year average Sources: Scotiabank Economics, QFREB. Chart 7 Montreal Sales-to-New Listings ratio -month moving average Sellers' Market Buyers' Market Roughly balanced market = 9- (based on one standard deviation from long-term average) Sources: Scotiabank Economics, QFREB. 1

2 May, 1 WEAKER, BUT STILL GOOD, AFFORDABILITY Housing affordability for buyers has been gradually eroding since 1, with home price increases outpacing income growth. Some further erosion is likely in 1 19 as mortgage rates continue to drift higher, however not to the extent that it is likely to pose a significant barrier to many households. Mortgage interest and principal carrying costs for buyers of an average-priced home in Montreal absorb around % of median household income, comparable to Calgary and well below the near record levels of roughly % and % in Vancouver and Toronto, respectively. 1 STRONG DEMAND FUNDAMENTALS Demand fundamentals remain broadly supportive after a banner year. Mirroring postrecession highs for Quebec real GDP and total employment growth, Montreal s CMA in 17 created nearly 7, jobs, of which more than, were full-time positions; both figures led all CMAs. The.% rise in total employment represented the strongest ever recorded annual advance and brought the unemployment rate to a record low of.7%. In 1, we look for job creation to cool from its cycle peak to just under %, remaining above the 1.% mean annual climb during 1 1. Consumer confidence and after-tax incomes also have been boosted by the steady provincial tax relief delivered through the Québec Economic Plan, notably eliminating the health contribution, raising the Basic Personal Amount and cutting the lowest bracket tax rate from 1% to 1%, relief that has helped to offset increases in municipal levies. In 19, Montreal s employment is expected to moderate further to 1¼%, in line with our provincial forecast. Demographic trends, including continuing high immigration levels and a surge in nonpermanent resident arrivals, also are favourable. Net immigration to Quebec totaled, in the four quarters to 17Q, while the number of non-permanent residents, including refugee claimants, increased by, to a new record high (chart ). Meanwhile, net interprovincial outflows over this period slowed to a five-year low of,. Roughly % of immigrants to Quebec in recent years have settled in Montreal, as have more than % of non-permanent residents. Foreign buyers play a small but growing influence in Montreal s housing market. Foreign buyers are estimated to have accounted for about 1.% of transactions across the Montreal CMA last year, somewhat lower than comparable figures for Vancouver and Toronto. Non-residents accounted for a 1.7% ownership share in of condominium apartments in 17, and.1% in buildings completed since 1. CITY COMPARISON The combination of strong economic growth and good affordability are key to Montreal s ongoing housing market outperformance relative to the national trend. Ottawa likewise continues to see strong sales and accelerating price appreciation, with demand underpinned by steady economic growth, record low unemployment, and good affordability. The new B- rules were expected to have less impact on Montreal s and Ottawa s housing markets compared with Toronto and Vancouver which have borne the brunt of the recent correction, given their lower price points and smaller share of uninsured mortgages. Neither city was hit by additional provincial policy measures, including foreign buyers taxes, aimed at cooling markets in the Greater Golden Horseshoe and Chart Chart 1 1 Net Migration to Quebec s, four-quarter moving sum International Immigration Non-permanent residents Interprovincial Sources: Scotiabank Economics, Statistics Canada. Benchmark House Prices HPI Composite Index January =1 Vancouver Sources: Scotiabank Economics, CREA. Toronto Montreal Ottawa 1 Our affordability calculation is based on the MLS average price, and assumes a % downpayment, a -year amortization, and the discounted -year fixed mortgage rate.

3 May, 1 BC s largest urban centres. While non-residents are a relatively small share of overall buyers across Canada, the abrupt adjustments in Toronto and Vancouver suggest that they at least had a dampening impact on overall market sentiment. Montreal and Ottawa also lack the froth that characterized the Vancouver and Toronto regions, which saw home prices soaring in excess of % y/y at their respective cycle peaks in mid-1 and mid-17. Montreal and Ottawa s price gains, in contrast, have been relatively modest in recent years (chart ). BUILDERS LOOKING UP Homebuilders are responding to the strength of demand. Almost, housing starts were initiated across the Montreal CMA last year, the highest annual tally since, led by new purpose-built rentals and condominiums. Activity has remained brisk in early 1. There are currently, units under construction, the highest level in at least two decades. Notwithstanding the sharp ramping up in new residential construction, there is little evidence of overbuilding in either the single-family or multiunit segments. The inventory of completed and unsold new homes has edged lower since 1 and is in line with historical averages (chart ). BALANCED RENTAL MARKET CONDITIONS Demand for rental housing also remains strong. Despite increased supply, Montreal s rental market has tightened over the past year, but remains fairly balanced overall, with a vacancy rate of.% for purpose-built apartment units. The vacancy rate for rented condominiums is somewhat lower at 1.%. Average rents for both classes of rental units remain fairly stable, rising about % last year. New rental supply in the pipeline is expected to be sufficient to meet demand over the next few years. Montreal benefits from a large and diverse rental stock, including a relatively large share of two-bedroom plus units. However, its rental stock also is antiquated, and may be in need of rehabilitation. Montreal s rental stock is dominated by purpose-built apartments, which account for almost % of existing units. Almost half were constructed prior to 19, compared with fewer than one fifth of rental units in the rest of the country. Rented condominiums, which are generally newer and offer greater amenities, account for a growing, but still small, % share of Montreal s rental stock. Montreal households, along with other CMAs in the province, have traditionally had a much higher propensity to rent than those in other regions of the country. The gap in homeownership rates is most pronounced among immigrant households, and seniors. The greater acceptance of renting as a tenure choice may reflect cultural preferences as well as affordability considerations. The relative cost of renting versus owning is relatively low in Montreal compared with other large Canadian centres, including Toronto, Vancouver and Calgary (chart ). Over time, however, rates of homeownership in Montreal, and Quebec more generally, have been catching up to other parts of the country (chart 7). Montreal s homeownership rate has increased steadily since the 197s, rising from.% in 1971 to.7% in 1. Homeownership rates in other parts of the country also have increased, most notably post-199, assisted by historically low interest rates, the introduction of government programs for first-time buyers such as the Home Buyers Plan, mortgage market innovation, and an aging population, but appear to have peaked as renter household formation outpaces the number of new homeowners. Chart Chart Vancouver 7 Montreal Toronto Cda avg Chart 7 Calgary Sources: Scotiabank Economics, Statistics Canada. % Montreal Unsold Inventory units per 1, population, end of period Row and apartment long-term average Singles and semis Sources: Scotiabank Economics, Statistics Canada, CMHC. Relative Shelter Costs ratio, average cost of renting versus owning, 1 Homeownership Rate Calgary Toronto Montreal Vancouver Sources: Scotiabank Economics, Statistics Canada.

4 May, 1 CANADIAN RESIDENTIAL MARKETS s of units, a.r., MMA New Home Construction y/y % change s of units New Home Inventory Row & apartment Singles & semis 1 1 Housing starts (LHS) New housing price index (RHS) - 1 Sources: Scotiabank Economics, CMHC, Statistics Canada. -1 Sources: Scotiabank Economics, CMHC. Existing Home Sales $, s s of units, a.r. 1 ratio of sales to new listings Existing Home Inventory Unit sales (RHS) Average price (LHS) Roughly balanced market 1 Sources: Scotiabank Economics, CREA. Sources: Scotiabank Economics, CREA Housing Starts Canada B.C. Alberta Sask. Manitoba Ontario Quebec Atlantic (s units, sa) ytd 1 9 1f f (units, nsa) Vancouver Calgary Edmonton Toronto Ottawa Montreal Halifax St. John s 11 17,7 9,9 9, 9,7,79,719,9 1,9 1 19,7 1,1 1,7,1,,91,7,1 1 1,9 1, 1,9,7, 1,,9 1,7 1 19,1 17,11 1,7,99,7 1,7 1,77 1, 1, 1, 17,,7,97 1,7, ,91 9, 1, 9,7,9 17,, 17, 11, 11,,7 7,7,7,7 7 1ytd 7,,9 9,19,,,9 1, Sources: Scotiabank Economics, CMHC. Year-to-date data are expressed at seasonally adjusted annual rates.

5 May, 1 CANADIAN RESIDENTIAL MARKETS 1 1 % Residential Mortgage Rates 7 Household Mortgage Debt Service % of disposable income Interest and principal -Year conventional Interest only Prime Sources: Scotiabank Economics, Bank of Canada. Sources: Scotiabank Economics, Statistics Canada. 1 1 y/y % change Residential Mortgage Credit Residential mortgages.7... Residential Mortgage Arrears % of mortgages in arrears three or more months Mortgage arrears.. Sources: Scotiabank Economics, Bank of Canada..1 Sources: Scotiabank Economics, CBA. Home Sales Canada British Columbia Alberta Man.-Sask. Ontario Quebec Atlantic Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units 11,9, 1,71 7,77,7,1 9,17,,999,9 1,1 77,1,9,1 1,91,7 1,9 7,,17,,7 7,7, 19,9,7 77,7,7, 1,19 9, 7, 7,9, 7,71 77,,7, 19,7, 71,19 9,77 1,1 1,97,9,91,, 7,1,99 7,7,,1 7,91 7, 9,77 1,9 1, 11,,7 1,1 9,1 9,,,,9,97 71,791 7,1,99,1 1 9, 1, 91,1 11,11 9,, 7,7,9,7,1 79, 7,1,, 17 9, 17,1 79,77 1,7 9, 7, 9,1,7,9,1 9,, 11,7,1 1ytd 79,1,1 7,9,7 9,,91 7,7,7,9 179,9 1,97, 1,99,9 Vancouver Calgary Edmonton Toronto Ottaw a Montreal Halifax Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units ,7,9,1,, 17,91, 91,7,9 1,9, 1,7 1,1, 1 7,, 1,1,,99 19,1 9,97,17, 1,91 1, 1,91 7,, ,7,9 7, 9,9,99,,9,9,9 1,1 19, 7,7 7,7,17 1 1,,9,,1 7,91,9,91 9,7, 1,1,9,917 7,71,11 1 9,1,1,1,99 79,1,7, 11,,1 1,9,9 9,1,7,97 1 1,17,,,7, 7,7 19, 79,91 11,7 7,9 1,1,9 1,9 9,, 17 1,1,,,9,9,1 19,9,7 9,1 9, 17,,1, 9,7, 1ytd 1,1,9 7,7,, 7,9 19,7 7,99 7,7, 1, 7,1,,17, Sources: Scotiabank Economics, CREA, QFREB. Year-to-date data are expressed at seasonally adjusted annual rates.

6 May, 1 US RESIDENTIAL MARKETS Housing Starts. mns of units, a.r., MMA. Total Single-Unit. Multiple-Unit.. Sources: Scotiabank Economics, US Census Bureau. Housing Starts by Region 1. mns of units, a.r., MMA 1. South.. West... Midwest Northeast Sources: Scotiabank Economics, US Census Bureau mns of units, a.r., MMA New Home Sales Average price (RHS) Unit sales (LHS) $, s, MMA. Sources: Scotiabank Economics, US Census Bureau mns of units, a.r., MMA Existing Home Sales Average price (RHS) Unit sales (LHS) $, s,mma 1 1 Sources: Scotiabank Economics, National Association of Realtors (NAR). Housing Starts Permits Total Singles Multis West South Midw est Northeast Total Singles Multis (millions of units) (millions of units) ytd f 1. 19f 1. Sources: Scotiabank Economics, US Census Bureau. Year-to-date data are expressed at seasonally-adjusted annual rates.

7 May, 1 US RESIDENTIAL MARKETS 9 7 % Mortgage Rates and Applications -year mortgage rate (LHS) MBA mortgage application index purchases only (RHS) index Housing Costs Consumer Price Index, y/y % change Owners' equivalent rent Rent of primary residence Sources: Scotiabank Economics, Mortgage Bankers Association (MBA), FHLMC. 1 - Sources: Scotiabank Economics, US Bureau of Labor Statistics New and Existing Home Inventories months' supply, MMA New Existing Sources: Scotiabank Economics, US Census Bureau, National Association of Realtors (NAR). Apartment Vacancy Rates 1 % 1 South 1 1 Midwest Northeast West Sources: Scotiabank Economics, US Census Bureau. Existing Home Sales New Home Sales Total Avg Months North Avg Price Months West South Midw est Total Price Supply East ($s) Supply (sa) (nsa) (nsa) (million units, saar, unless otherwise noted) ytd Sources: Scotiabank Economics, National Association of Realtors (NAR), US Census Bureau. Year-to-date data are expressed at seasonally-adjusted annual rates. 7

8 May, 1 INTERNATIONAL RESIDENTIAL MARKETS International House Prices (Inflation-adjusted, y/y % change) Q1 17Q 17Q 17Q Australia Canada France Germany Ireland Italy Japan Spain Sw eden Sw itzerland United Kingdom United States Russia Brazil Chile Colombia Mexico Peru China India Indonesia South Korea Thailand Sources: Scotiabank Economics, Bank for International Settlements Real house prices, 199=1 UK Sweden Real house prices, 199=1 Australia Switzerland 1 Canada United States Sources: Scotiabank Economics, BIS, OECD Sources: Scotiabank Economics, BIS, OECD. 1 1 Real house prices, 199=1 Ireland France Spain Sources: Scotiabank Economics, BIS, OECD. 1 1 Real house prices, 199=1 Germany Italy Japan Sources: Scotiabank Economics, BIS, OECD.

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