Canadian housing glut: National inventories hover near all-time highs, Toronto still climbing
August 22, 2019
Erik Fertsman
Back during the summer months of 2017, home price growth across cities in Canada began experiencing deceleration. Just before this period, various levels of government began experimenting in the housing market, looking to reign in foreign home buyers, money launderers, and other more nefarious forms of money that were suspected of creating a bubble in Canadian real estate.
However, authorities were primarily looking to protect consumers who might be getting in over their heads with a mortgage they might not be able to afford. So, in British Columbia, a foreign-buyers tax was implemented, while national authorities added provisions to mortgage loan qualifications. Now folks applying for mortgages need to qualify via an above-market interest rate, even though interest rates have been trending downward since the 1970s.
The result
was a collapse in "high-ratio" mortgage growth (credit issued to folks with high debt-to-income ratios), followed by a deceleration in mortgage growth for all other borrowers. It was all done in the name of affordability, because prices in cities like Toronto and Vancouver were crushing people. Canadians have become some of the most indebted humans on planet Earth, and things were just getting out of hand. When you run the numbers you see just how ridiculous home prices have been, outrunning Canadian wages, for example.
Since all of this went down, home price growth has not returned to "normal": Stats Can's national index is contracting for the first time in 10 years, and
Teranet and the National Bank of Canada's index is flirting with negative territory. Economists and analysts are still trying to figure out what slowed down the housing market. It all escalated, but not very quickly. To see just how slowly Canada's housing market has been decelerating, we need to look back at the last three years.
Article continues below.
Canada's housing glut
One thing we haven't discussed on this site, yet, is housing inventory. Fresh data from Statistics Canada reveals housing inventory still remains historically-high after posting a fresh 10 year peak earlier this year in March.
This has had a negative impact on home price growth, because excess supply creates more of a buyers market. If there's too much supply, prices can get pushed down pretty fast, depending on how long investors/sellers are willing to hold out. Earlier this year, there was some talk about how this supply would quickly dissipate. But, right now, the unabsorbed supply count is still sitting pretty high; it's turning into a full blown housing glut.
See the chart below:
On the chart we can see how, back in September of 2016, a total of 5,322 units were recorded as unabsorbed (black line). Some homes were built across Canada and these ones were not selling. This figure was quite low, historically-speaking, so price growth (orange line) was on the up and up as folks were buying homes and getting mortgages.
At the time, there was little regard for the number of unabsorbed inventory. So, in March 2017, the summer sales season kicked in, and nobody was paying much attention to unabsorbed housing supply. Everything was hunky dory. However, even before the sales season came to an end in 2017, something wasn't quite right. In August of that year, inventories started to increase. Meanwhile, home price growth began to decelerate, quickly. Before anyone knew it, December 2017 recorded a jump in unabsorbed supply when compared to the previous winter.
This is where things started to go downhill for the real estate market; the supply blunder began wreaking havoc on home price growth. But, more importantly, we began to see mortgage credit growth (teal line) suffer. As I've
shown you in another post, home price growth is driven largely by mortgage credit. So, if we're not adding billions in mortgage credit to the real estate market, prices simply won't experience growth and inventory will start to build up.
As a result of the trends set in 2017, the housing glut became much more pronounced when inventories spike after at the beginning of 2018. From trough to peak, unabsorbed inventory experienced a 45 percent increase and recorded 7,725 units in March of this year, the highest going back a decade. Coincidentally, this is relatively the same level of unabsorbed inventory we saw back at the peak of the 2008 financial crisis.
If you look at the latest, the inventory build-up has backed off a bit, but we're not out of the woods yet. And with the summer sales cycle now in full swing, everyone is watching the inventory. If it doesn't drop enough, during the winter months we could see the statistic jump again, and that won't do anyone who's invested in real estate any good.
Vancouver inventory slowly dissipating, but prices are crashing
The inventory problem can be broken down subnationally, as well. In Vancouver, the epicenter of the greatest property bubble in history (what I like to call it), inventories are near a three year high. We don't need to look beyond three years, because... well, here, take a look at the chart and you'll see:
As you can see, inventories (black line) have been increasing as price growth (orange line) has been decelerating. In July, Vancouver prices skipped the hard landing and went straight into negative territory, shrinking by -6.23 percent! Yet, inventories have yet to substantially subside.
The bubble is finally bursting, prices are falling, but inventories keep building. It's a terrible situation, because the price correction now has so much momentum, it's not clear when the correction will stop. Price growth has been falling since the inventory levels were in the 700s, but we're now still hovering around 1200.
Toronto inventory is skyrocketing, but prices haven't caught wind yet
Believe it or not, but things in Toronto are even worse.
Check this out:
Prices made a hard landing, bouncing out of negative territory last summer, but unabsorbed inventory is up 100 percent this year. In fact, it looks like the unabsorbed inventory is accelerating with no end in sight.
Prices for the summer sale season have stabilized and are trading sideways, but the raging supply glut is going to put a lot of pressure on sellers over the winter. Low interest rates could let sellers hold out until next summer, but at some point sellers are going to need to discount their inventories.
The prize for the worst inventory build-up goes to Edmonton, Alberta
The province of Alberta has its own set of issues other parts of Canada don't have to face. The province has a large resource and energy sector which has been suffering from low commodity prices like below world-market priced oil.
As a result, the housing downturn started in the province before the mortgage standards were tightened. This has resulted in the largest build-up of inventories in Canada:
For the past 3 years, Edmonton home price growth has mostly traded negatively. It's a provincial thing, as you can see Calgary home price growth has performed the same.
Edmonton has the highest unabsorbed inventory, and it's down only marginally since the peak in January of this year. There's still quite a bit of downside before inventory reaches a point where price growth might get some relief.
What to make of all of this
As discussed above, this situation has been created by a cocktail of factors. Overall, these high unabsorbed inventory conditions in key Canadian markets could mean one of two things: either folks are unwilling
to buy these newly constructing housing units, or they are unable
to buy them due to affordability and access to credit issues.
If it's the former, then we likely have a price correction coming up in order to get sellers to meet buyers' demands. However, if it's the later, things are going to get a little tricky, and a likely price correction could drag out longer to meet affordability (according to economic realities like wages) and the higher qualifications buyers now need to meet to get a mortgage.
Economic headwinds won't help the situation either, because if people start to lose jobs or the banks become too scared to lend, then all bets are off for both buyers and sellers. Right now we know for sure that excess supply is putting a damper on home price growth, as cities with recorded unabsorbed inventories are posting slumping or contracting growth rates. The only way to change this is to pump out mortgages and get folks buying this inventory.
Cover image source: Sander Dalhuisen
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