Key indicators combined with lender risk mitigation measures shore up expectations of resilience.
Interest rate hikes served to destabilize most major Canadian housing markets beginning in 2022, however a new report from RE/MAX Canada reveals that homeowners are well-positioned to ride out the coming storm in large part due to lower loan-to-value ratios on new mortgages.
The RE/MAX 2023 Canada Housing Barometer Report examined average price and new mortgage values published by CMHC-Equifax Canada in 12 major markets from British Columbia to New Brunswick, to compare loan-to-value (LTV) ratios between Q3 2012 and Q3 2022. The report found that LTV ratios had declined in 67 percent of markets (eight) over the past decade, with the greatest drops noted in London and Moncton (21 percent), Halifax (15 percent), Hamilton (14 percent), Toronto (10 percent) and Ottawa-Gatineau (nine percent). Four markets, including Calgary, Edmonton, Saskatoon, and Regina, were up over 2012 levels, a trend that is set to reverse in the years ahead as Alberta and Saskatchewan’s economic engines gain momentum and drive home-buying activity. The lowest loan-to-value ratios were found in the most expensive markets, including Vancouver (50 percent), Toronto (53 percent), and Hamilton (54 percent) while the highest loan-to-value ratios were found in Regina (88 percent) and Edmonton (83 percent). Nationally, loan-to-value ratios hovered at 57 percent.
Three factors were largely responsible for the downward pressure on loan-to-value ratios over the past decade, according to the Canada Housing Barometer Report: equity gains, the pandemic facilitating the ability to work remotely in smaller markets, and the transfer of intergenerational wealth, particularly in the latter half of the last decade and the early 2020s.
FACTS & STATS
MARKETS WITH THE LOWEST APPRECIATION OVER THE 10 YEAR PERIOD REPORTED THE HIGHEST LOAN TO VALUE RATIOS.
8 OUT OF 12 MARKETS ANALYZED SAW THE LOAN-TO-VALUE RATIO DECLINE OVER THE 10 YEAR PERIOD EXAMINED.
THREE FACTORS WERE LARGELY RESPONSIBLE FOR THE DOWNWARD PRESSURE ON LOAN-TO-VALUE RATIOS OVER THE PAST DECADE.
“Risk factors for the overall housing market are greatly reduced when homeowners own a larger proportion of their homes. With half of loan-to-value ratios within the 50- and 60-per-cent range in Canadian markets, homeowners are better able to withstand downward pressure on housing values and fewer will find themselves underwater, carrying upside down loans.”
Canadian buyers are much better qualified than a decade ago as a result, according to the RE/MAX report. A recent CMHC-Equifax Canada report confirmed a significant reduction in the number of buyers with credit scores under 660 in the past decade. Nationally, that number fell to 4.7 percent in the third quarter of 2022, down from eight percent a decade earlier. Ottawa-Gatineau, at 3.9 percent, had the lowest share of new mortgage holders with credit scores below 660, while Winnipeg had the highest at 6.4 percent. The loan-to-value ratio in all markets was down from decade-ago levels.
Mortgage delinquency rates have also fallen in most markets across the country, with the national percentage sitting at just 0.14 percent – down just over 63 percent from levels reported in 2012. The lowest rates can be found in Ontario and British Columbia, where the delinquency rates are below 0.08.
Rapid population growth was identified as a primary catalyst in driving home-buying activity over the past decade, with the quarterly population estimate rising 12.1 percent nationally from Q3 2012 to Q3 2022. Interest rates also played a starring role over the 10-year period, with the overnight rate dropping to 0.25 percent in May of 2009 and maintaining relatively low levels throughout the 2010s, climbing in 2018 and 2019 only to fall again to 0.25 percent in 2020.
Population growth is expected to continue in the years ahead, given the federal government’s commitment to increase immigration levels, but interest rates will likely remain relatively high in the foreseeable future, which should temper home-buying activity to some extent, particularly in the first half of the year.
“As we head into 2023, there are likely to be challenges, but a healthy number of homebuyers are expected to continue to enter the country’s housing markets from coast to coast,” says Ash. “The trend toward smaller markets should continue to play out in Atlantic Canada, Ontario and Western Canada —areas where in-migration from more expensive markets has occurred recently. Major centres in Alberta and Saskatchewan are expected to see strong growth in the year ahead as provincial economies continue to operate on all cylinders. However, there could be some tough times ahead for larger markets that are seeing an uptick in over-extended buyers, as well as increased financial hardships for parents who helped their kids into homeownerships by taking out Home Equity Line of Credit (HELOCs). While most chartered banks are typically willing to work with homeowners in distress situations, buyers that chose to work with private lenders are having a different experience, as evidenced in recent stories in the media.”
While overall risk to the Canadian housing market remains low, risk mitigation remains top of mind for regulators, given real estate’s impact on the Canadian economy. The sector has accounted for 10 to 17 percent of GDP in recent years. The government’s OSFI stress test is among the additional measures aimed at reinforcing the country’s real estate market going forward. While still in development, it would look at addressing three key factors: mortgage size and debt load, new debt service ratios, plus a new interest rate stress test. Given the success of the Stress Test to date (qualifying buyers at two percent above posted rates since 2018), it’s clear some constraints can prove invaluable. That said, further measures that would make it more difficult for Canadians to realize home ownership, while well-intentioned, may potentially cause more harm than good.
“At the end of the day, what’s evident by the loan-to-value ratios and by policies to discourage speculation and over-extension is that real estate is and will always be a long-term hold,” explains Alexander. The Canada Housing Barometer Report shows that most purchasers are aligned with that philosophy, as demonstrated by their tenacity to get into the market and hold steady. Savvy homebuyers and homeowners are looking to offset carrying costs by reducing their footprint—choosing smaller homes, as reported in Ottawa, or renting out basement suites in their homes, a trend noted across the board, but especially apparent in London and Saskatoon. Some buyers are purchasing duplexes and other multi-unit properties and living in one of the units. Multi-generational sales are also happening with increasing frequency across Canada, whereby two or three generations live together. This trend was strong in Toronto’s 905 region, as well as in Winnipeg and Saskatoon.
“The bottom line is that the dream and desire for home ownership is unmistakable,” says Alexander. “The mechanisms in place to underpin stability are working, and although more challenging conditions in 2023 may cause some to temporarily take pause, the longer-term outlook remains positive. Once the Bank of Canada has signalled that it is done with quantitative tightening, the market is expected to return to more normal levels of homebuying activity overall.”
Alberta’s strengthening economic engine continues to fuel robust home-buying activity in the province’s largest centre. Calgary is one of few markets in the country reporting an increase in home sales in 2022, with the number of properties sold climbing by just over seven percent, while prices rose close to five percent year-over-year. Inventory levels continued to dwindle, falling 21 percent from 2021 levels. Despite higher interest rates, multiple offers are occurring, with the greatest activity reported in the $450,000 to $650,000 range for single-detached homes and $240,000 to $270,000 for condominiums. The rebound in the oil and gas sector has greatly contributed to the overall health of the housing market. Over the past decade, challenges in the resource sector cast a shadow over housing performance throughout the province, which was reflected in the 10-year stats. Average price in the Calgary CMA in Q3 2022 rose just 18.2 percent to $503,450 over the past decade, up from $425,820 during the same period in 2012. The loan-to-value ratio edged up to 74 percent in 2022, up three percent over the 71 percent reported in 2012. The market’s trajectory changed during the pandemic, coming alive as the province’s economic destiny changed course. In-migration has gained momentum in lockstep in recent years, as evidenced by the uptick in population. According to Statistics Canada, Alberta experienced a 2.7 percent increase between the first and fourth quarter, welcoming more than 118,929 people to the province. Buyers from British Columbia and Ontario are arriving almost daily, attracted to the city’s affordable housing stock and well-paying jobs. With Alberta expected to lead the country in terms of economic growth in the year ahead, home-buying activity in Calgary should remain strong for the foreseeable future.
Courtesy RE/MAX Canada