Canada's Housing Market - Dynamic Funds
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August 25, 2021
Canada’s Housing Market
Canadian house prices have surged, up by 17.8% over the past year (see Chart of the Week). There
are regional differences, with Ottawa’s housing market running particularly hot and Edmonton’s
bringing up the rear, but the pandemic has done little to stop this runaway freight train.
It is now 23 years, and counting, from the end of the last significant house price correction. The
generational boom has carried prices 316% higher over this timeframe. The cost of homeownership
has been rising, particularly for lower income Canadians. But the sharp decline in mortgage rates has
taken some of the sting out of the ownership equation. Nevertheless, one third of Canadians that own
a home report that they have become “house poor”. With an estimated stock of 14 million homes and
an average of just under 3 people per home, that leaves one heck of a lot of Canadians in a position
of financial vulnerability.
By almost any yardstick, the domestic housing market is expensive. Canadians have taken on more
debt to acquire their houses. Asset overvaluation and leverage is a bad combination. The glue
holding this all together seems to be a combination of historically low borrowing rates and ongoing
gains in employment and income. If these conditions were to reverse, so too could the Canadian
housing market. For now, it seems like it’s business as usual.
Chart of the Week: House prices surge
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reserved. Dynamic Funds® is a registered trademark of its owner, used under license, and a division of 1832 Asset Management L.P.Canadian House Prices: A 23-year Bull Run…and counting
+199%
+316%
+3% -16%
During the period from 1989 to 1998, Canadian house prices remained roughly flat in nominal terms
but declined by about 16% after adjusting for inflation. Why we bring this up is because it represents
the last notable correction for Canadian house prices.
During the period, the domestic economy suffered recession, a sluggish labor market recovery, rising
sales, payroll and excise taxes, depressed commodity prices, and the possibility that Quebec might
separate from the country. None of these developments were helpful for house prices.
Following that lengthy adjustment, house prices started to gain a head of steam. Some economic
historians suggest that the handover of Hong Kong in 1997 caused many Hong Kongers to immigrate
to Canada and buy assets (e.g., houses) safe from communist China’s reach. The influx in foreign
investment was reinforced by local speculative activity, facilitated by a steady diet of declining interest
rates.
Housing took off and has never looked back. Since 1998, house prices have vaulted higher by 316%,
or 199% after inflation. It has been a record run for Canadian homeowners.
2Housing Affordability: Very stretched for some
Housing affordability attempts to summarize the costs associated with owning a home. The simple
affordability index we show here represents the ratio of average mortgage payments to average
income. It suggests that about 35% of our income now goes to pay for a home, up significantly from
the 27% reading set in the late 1990s. Yet, it is nowhere near the levels experienced throughout the
1980s.
The decline in interest rates has been a huge benefit to this affordability index over time. Even while
house prices have been rising at a rapid pace, the sharp decline in borrowing costs has kept
affordability readings at bay. Keep in mind, this is an aggregate reading and is heavily distorted by the
process of averaging people’s incomes.
The OECD finds that 41% of low-income Canadians with a mortgage are what they consider cost
overburdened (i.e., spending >40% of income on housing). This compares to 24% for the low-income
population across all OECD countries. Meanwhile, the latest IPSOS survey finds that 32% of
Canadian respondents that own homes claim to be “house poor”. This is when a household devotes
so much of their income towards housing that they can’t afford much else. This same survey notes
that 45% of households won’t be able to cover their living expenses over the next 12 months without
taking on more debt. Half of the respondents report that they are concerned about their ability to
repay debt in the future.
3Risks
The housing market is Canada’s “elephant in the room”. The size of the housing market as a share of
GDP has recently surpassed 10%, a record based on data that goes back to the end of the Second
World War. The indirect reach is likely to be much larger, which is something we learned about during
the last U.S. housing crash when experts told us that at 6.7% of GDP, the residential real estate
debacle would likely be contained.
This is not meant to be a prediction of an impending real estate crisis, only that a crisis is possible.
Houses are historically expensive benchmarked against rent, income or inflation. Mortgage debt now
comprises a record 70% of all loans in the economy. Household debt to disposable income is
hovering near a record 180%. Asset overvaluation combined with leverage is a dangerous
combination.
Yet, we could have said any of this 3, 5 or even 10 years ago. The key to holding it all together seems
to be the combination of historically low borrowing rates and ongoing gains in employment and
income. An extended period of problems in the labor market, or sharply higher borrowing costs, seem
to be the most likely catalysts to set a domino effect into motion. For now, that is more of a risk than a
reality. The percent of mortgages in arrears sits near the lowest level seen in about 30 years.
4High Frequency Data Tracker
Economics
100
Citigroup Economic Surprise Index: Global ▪ The Economic Surprise Index has moved sharply
lower and is now below the zero-line implying that
negative data surprises have outnumbered the
60
positive ones.
20 ▪ Initial jobless claims have been on an improving
track with the latest reported number at 348K; the
lowest since the start of the pandemic.
-20
▪ High-frequency retail sales growth (year-over-year
-60 basis) has averaged +16% over the past 12 weeks.
This is a very good sign for the retail sector as well
Source: Haver Analytics consumer sentiment, in general.
-100
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
7000 25
Source: Haver Analytics
Redbook Retail Sales (yoy% chg)
6000 20
5000 US Initial Unemployment Claims (000s) 15
4-wk MA
4000 10
3000 5
2000 0
1000 -5
Source: Haver Analytics
0 -10
Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20Equities
4800
▪ The S&P 500 and TSX, are both at/near their
Source: Bloomberg
respective all-time highs.
4300 S&P 500
50-DMA
▪ The VIX Index has been trending lower, reflecting
200-DMA the risk-on sentiment in equity markets, and is near
3800 its lowest level in 18 months.
3300
2800
2300
1800
Jan-15 Jan-17 Jan-19 Jan-21
88 Source: Haver Analytics
22500
TSX
50-DMA 78
200-DMA
20500 CBOE VIX
68
18500 58
48
16500
38
14500
28
12500 18
8
Source: Bloomberg
Jan-15 Jan-17 Jan-19 Jan-21
10500
Jan-15 Jan-17 Jan-19 Jan-21Fixed Income
4.0 ▪ U.S. 10-year Treasury yields reached 1.13% in early
US 10-yr Treasury Yields (%) August after peaking at 1.77% in March. Currently,
3.5
Cdn 10-yr GoC Yields (%) the bond yield is at 1.29%. In Canada, 10-year
3.0
government bonds have made a similar move with
the current yield at 1.18%.
2.5
▪ High yield spreads remain extremely narrow relative
2.0
to history despite a recent uptick.
1.5
▪ Volatility in the bond market has increased over the
1.0
past two months according to the MOVE Index.
0.5
Source: Bloomberg
0.0
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
170
11
150
10 Merrill HY minus 10-yr Treasury Yield (%)
MOVE Bond Volatility Index
9 130
8
110
7
90
6
5
70
4
50
3
Source: Bloomberg Source: Bloomberg
2 30
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20Currencies
105
DXY US Dollar Index ▪ The DXY U.S. dollar index’s overall trend since the
100 50-DMA end of May has been up, reflecting strength in the
200-DMA USD.
95
▪ Meanwhile, a basket of Asian currencies has
90 weakened against the USD over this timeframe –
since the end of May.
85
▪ The Canadian dollar has also weakened against the
80 USD, falling from 0.83 cents to 0.79 cents, over this
period.
75
Source: Bloomberg
70
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
1.10
1.5 1.05 USD per CAD
USD per EUR 50-DMA
1.00
50-DMA 200-DMA
1.4
200-DMA 0.95
0.90
1.3
0.85
1.2
0.80
0.75
1.1
0.70
Source: Bloomberg
Source: Bloomberg
1.0 0.65
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20Commodities
2150
Gold ($ / Troy Ounce) ▪ Gold bullion prices have rallied back up to the $1800
50-DMA
per ounce level again after a brief drop to $1690
1950
200-DMA
earlier in the month.
1750 ▪ The WTI crude oil price is currently just below $68
per barrel and has been trading between the 50-day
1550 and 200-day moving averages.
1350
▪ Copper prices have held at elevated levels, near
$4.25 per pound, after an impressive rally this year.
1150
Source: Bloomberg
950
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
115 520
WTI Crude ($/barrel)
Copper (US cents/lb)
95 470
50-DMA 50-DMA
200-DMA
75 200-DMA
420
55
370
35
320
15
270
-5
-25 220
Source: Bloomberg
Source: Bloomberg
-45 170
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20You can also read
