CONSUMER CONFIDENCE AND REAL ESTATE MARKET PERFORMANCE GO HAND-IN-HAND The job market, mortgage interest rates and the migration balance are often considered to be the main determinants of real estate market performance. However, economists and market analysts also often use consumer confidence, particularly its sub-index relating to real estate, to support their arguments about a market s performance. One can question whether consumer confidence is a determinant of real estate market performance or whether it is simply influenced by the same factors. Whatever the case may be, these two variables appear closely related. What is consumer confidence? Consumer confidence is a reflection of consumers perceptions about current and future economic conditions. There are a few confidence indexes in Canada that aim to measure these perceptions using a monthly survey among households from different provinces across the country. The QFREB chooses to follow the Conference Board of Canada s Index of Consumer Confidence, which uses a survey that is composed of four questions regarding households views about the labour market and its outlook, their personal finances and their feelings about making a major purchase. This last aspect is particularly relevant for forecasting the evolution of the real estate market, as households are asked to answer the following question: In your opinion, is now a good time for an average person to make a major purchase, such as a home or a car?. We are interested in the proportion of consumers who answered yes to this question. Here is an overview of the results of the consumer confidence survey across Canada for 2017. From coast to coast: a divide between East and West The first two questions in the survey seek to measure the financial situation of families in relation to what it was six months earlier and what it will be in six months from now. Québec is in the middle of the pack in terms of the proportion of respondents who say their financial situation has improved: the Atlantic provinces and Ontario show a bit more optimism while the Western provinces have the lowest proportions.
Question 1: Considering everything, would you say that your family is better or worse off financially than six months ago? (Proportion that answered better, average for 2017) 18.4% 18.3% 18.5% 16.0% 15.4% 17.7% Question 2: Considering everything, do you think that your family will be better off, the same or worse off financially six months from now? (Proportion that answered better off, average for 2017) 22.6% 26.4% 23.2% 19.6% 21.5% 22.0% Quebecers, however, were the most optimistic about their future financial situation. It is in Québec that the largest number of respondents, proportionately, believe that their financial situation will improve in the next six months. It is interesting to note, on the one hand, that the level of optimism measured by these two questions has increased significantly in Québec since reaching a low point in 2014 and, on the other hand, that Québec is the only province to have experienced continuous growth in terms of the proportion of positive responses to these two questions. More specifically, the proportion of Québec respondents who thought their financial situation had improved in 2014 was only 10.3 per cent, but the proportion who believed that their situation would improve was 19.3 per cent, for respective increases of 8 and 7.1 points in three years. It is in Québec that the largest number of respondents, proportionately, believe that their financial situation will improve in the next six months. Question 3: How do you feel the job situation and overall employment will be in this community six months from now? (Proportion that answered better, average for 2017) 11.2% 12.4% 12.2% 10.5% 19.7% 12.7% The third question relates to the job market. Québec s results are similar to those of most other provinces, with the exception of Alberta who is expecting its job market to recover from the consequences of the drop in oil prices that began in early 2015. In fact, Québec has shown a steady increase in this regard over the period from 2014 to 2017. As a sign that this measure of confidence reflects reality, the Québec job market, which had a difficult year in 2014, is now back on its feet, and has registered steady monthly increases in job numbers since February 2015 1. The Québec job market, which had a difficult year in 2014, is now back on its feet, and has registered steady monthly increases in job numbers since February 2015. 1 Source: Labour Force Survey, Statistics Canada. Year over year variations (one month compared to the same month of the previous year) 2
Quebecers, the most confident about real estate Question 4: Do you think that right now is a good or bad time for the average person to make a major outlay for items such as a home, car or other major item? (Proportion that answered yes ) 28.0% 39.4% 28.5% 25.8% 25.3% 24.7% Finally, the most relevant question for real estate analysts shows that Québec had the highest percentage of respondents who believe that conditions are favourable for making a major purchase, such as a property. In fact, Quebecers have been the most optimistic in this regard since the beginning of 2015. Indeed, the year 2015 was marked by a sudden and considerable increase in consumer confidence towards real estate: the average proportion reached 35.9 per cent, compared to 26.9 per cent in 2014. The upward trend continued in 2017, and the proportion of optimistic Quebecers reached or exceeded the 40 per cent threshold four times since the start of the year. Outside of Québec, we see that the provinces that experienced significant increases in residential sales in 2017 are those that also saw an increase in the proportion of consumers who have confidence in the real estate market, such as Alberta and the Atlantic provinces. In contrast, the Prairie provinces and Ontario saw their sales decline, as did their level of confidence. Québec had the highest percentage of respondents who believe that conditions are favourable for making a major purchase, such as a property. The proportion of optimistic Quebecers reached or exceeded the 40 per cent threshold four times since the start of the year. Proportion of confident consumers Change in confidence 2017* vs 2016 Change in residential sales 2017* vs 2016* Atlantic provinces 28.0% +3.2 pp +1.6% Québec 39.4% +2.6 pp +5% Ontario 28.5% -1.2 pp -10% Saskatchewan and 25.8% -0.8 pp -1.5% Alberta 25.3% +7.5 pp +8.8% British Columbia 24.7% +1.4 pp -13% *From January to September only Sources: Conference Board of Canada and CREA 3
Overview of Québec consumer confidence in the real estate market over the past ten years Links between the sub-index of consumer confidence and the real estate market can certainly be traced by looking at the evolution of the proportion of Quebecers who said that it was a good time to buy a property. Over a span of ten years, four periods with different trends can be seen on the graph below, each reflected in the evolution of residential sales and prices in Québec. Proportion of Québec consumers who believe the time is right to make a major purchase Source: QFREB by the Centris system Period 1: The financial crisis The year 2007 was a record year for the real estate market in Québec, with a number of transactions that has still not been matched. The momentum of 2007 was halted during the recession that occurred in 2008 and 2009. The graph above shows that confidence had deteriorated significantly in 2008 during the financial crisis, when the recession was taking place in Canada and the subprime crisis was raging in the United States. At the same time, Québec s real estate market saw a sharp decline in sales. Period 2: After the financial crisis By the spring of 2009, confidence had recovered. The financial crisis had lowered mortgage interest rates and the Bank of Canada said it would keep its key interest rate at its low of 0.25 per cent until July 2010. A greater proportion of Quebecers believed it was a good time to make a major purchase. The Québec real estate market was also performing well, with strong sales gains and property price increases. Optimism was maintained at relatively high levels until the government started calming the situation by introducing its first mortgage tightening measure. 4
Period 3. Mortgage tightening measures and a soft landing A series of measures aimed at restricting mortgage credit were introduced by the federal government in April 2010, March 2011, April 2011 and July 2012, which seemed to have cooled many Québec consumers. As a result of these changes to mortgage financing, the proportion of respondents who felt that it was a good time to buy a home was maintained at levels below 30 per cent on average, and had repercussions until the end of 2014. The province s real estate market was not particularly convincing either, with decreases in sales and, at best, stability in prices. Period 4. Recovery Since the start of 2015, the consumer confidence level has been higher than the average of the last ten years, and there has also been an upward trend in the confidence level. More recently, the proportion of Quebecers who believe the time is right to make a major purchase, such as a home, has exceeded 40 per cent nine times in the last 17 months, an unprecedented proportion that has not been seen since the summer of 2005. At the same time, on the residential real estate market, sales and prices have returned to growth in Québec: sales increased by 5 per cent in both 2015 and 2016, and have posted the same increase since the start of 2017. Weighted average price growth in Québec has also strengthened over the past two years, with increases of 3 per cent in 2016 and 4 per cent from January to September 2017. A positive correlation between sales and confidence As we can see in the box above, the real estate market and the confidence sub-index appear to be linked. The following graph illustrates the evolution of the number of Centris sales and consumer confidence in real estate in Québec since 2007. Proportion of Québec consumers who believe the time is right to make a major purchase and seasonally adjusted residential sales Sources: QFREB by the Centris system and Conference Board of Canada 5
While this graph may suggest a correlation between the two variables, caution must be used, as the correlation in this case is rather weak. In fact, the correlation between seasonally adjusted Centris sales and the confidence sub-index is 0.46 over the period examined, which is considered to be a moderate correlation. This correlation does not change when confidence and sales lagged by one month, and it decreases if the periods move further apart. It is therefore not wrong to conclude that sales and the proportion of Quebecers who feel it is a good time to buy a property follow the same trends, and do so at the same time. October 2017 The correlation between seasonally adjusted Centris sales and the confidence sub-index is 0.46 over the period examined, which is considered to be a moderate correlation. Another reason for exercising caution is that a correlation even a very strong correlation does not necessarily indicate a cause-and-effect relationship: in other words, an increase in Québec consumer confidence does not necessarily lead to an increase in residential sales in Québec. Various other factors may be behind the synchronized movement of confidence and sales. For example, an increase in the employment level may lead to an increase in both confidence and residential sales. In fact, the evolution of Centris sales is moderately correlated (0.43) with the survey s third question, which focuses on the job market outlook. Similarly, a softening of mortgage credit or a drop in mortgage rates could boost consumer confidence and also lead to an increase in residential sales. Weak link between prices and confidence In terms of prices, the graph showing the evolution of confidence in the real estate market and the change in the weighted average price of properties suggests a certain positive, albeit uneven, correlation over the period examined: for a given level of confidence, price growth was much stronger at the start of the period than at the end. Proportion of Québec consumers who believe the time is right to make a major purchase and change in the weighted average price Sources: QFREB by the Centris system and Conference Board of Canada 6
The correlation of the variables shown in the graph is rather weak, at 0.18 when the periods are the same and at 0.24 when the confidence variable is advanced by two months, which is still a weak correlation. This means that the confidence sub-index and price growth do not move together, or at least very little. It is normal for consumer confidence to be reflected more significantly in property sales, as its impact is probably limited to the demand for properties, whereas price fluctuations are the result of the dynamic between property supply and demand. This means that the confidence sub-index and price growth do not move together, or at least very little. Conclusion: when real estate goes well, confidence goes well and vice versa Consumer confidence, and more specifically the sub-index related to the real estate market, is an interesting variable to watch as it seems closely linked to the real estate market. Consumer confidence evolves in the same way as the real estate market, but it is not a leading indicator. The possibility of causality, which can be unidirectional or bidirectional, should not be ruled out. Would consumer confidence stimulate an increase in sales or is it the good performance of the real estate market that inspires a sense of confidence in real estate among respondents? While its correlation with the evolution of Centris sales is only moderate, and a causal link cannot be concluded, consumer confidence remains a variable on which economists and analysts will continue to rely to qualify the performance of the real estate market. In any case, they will not be wrong in saying that the real estate market is doing well (or poorly) and that, in addition, a large proportion of consumers believe (or not) that the time is right to make a major purchase. Consumer confidence will therefore confirm that good real estate market performance is no accident when the confidence level is doing well. This publication is produced by the Market Analysis Department of the QFREB. Paul Cardinal Manager Camille Laberge Economist Antoine Abdulnour Grondin Market Analyst Contact us at stats@fciq.ca 2017 Québec Federation of Real Estate Boards. All rights reserved. 7