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The Canadian housing market continues to be red hot and this spring promises to be even busier. Even a recent interest rate increase doesn’t seem to be enough to dissuade potential buyers. In fact, buyers are rushing to lock in rates in advance of further expected hikes from the Bank of Canada.

January 2022 saw the highest monthly price increase ever recorded in Canada. And not just in the major housing markets like Toronto and Vancouver. This is largely due to a historic supply shortage.

One way of highlighting that shortage, according to Scotiabank Economist Farah Omran, is by looking at Canada’s ratio of homes to population and comparing it to the G7 average. Through that lens, Canada is way behind.

“We calculated that for Canada to only reach the G7 average, we need an additional 1.8 million homes. To give some perspective, we have been completing, on average, 180,000 homes a year for the past 10 years,” Omran said on the latest Perspectives podcast. At that rate it will take over a decade to just get Canada’s ratio to the G7 average level. And that’s without factoring in population growth and immigration.

John Webster, Scotiabank’s Head of Real Estate Secured Lending, points to the findings of the recent Report of the Ontario Housing Affordability Task Force for a potential solution. Webster says planning laws are too slow, outdated and don’t allow for the density required to address the supply issue.

“Municipalities are choking on requests for intensification, and they can't deal with it. Whether they're the larger urban municipalities or the more suburban ones, they're all faced with this issue. So, we need desperately in this country to streamline the planning and approval process with an end goal of adding more dwelling units,” Webster said on the Perspectives podcast. “That's what we need to address with much more creative approaches to how we live going forward.”


Stephen Meurice: ‘Housing markets are on fire.’ That's the line we used to start an episode right around this time last year. But is that fire still burning? Well, the average home price in Canada was up almost 21% in January compared to a year before. That's just under $750,000. And that's according to the Canadian Real Estate Association. So yeah, I'd say there's still some heat out there. So, we've invited back our favourite pair of resident real estate experts to tell us what the market looks like as we head into the spring. Traditionally that's the busiest season for real estate sales. Farah Omran is an economist at Scotiabank. She monitors and analyzes the real estate market. John Webster is Scotiabank’s Head of Real Estate Secured Lending. 

Let's get started.

Farah, John—welcome back to Perspectives.

Farah Omran: Great to be here.

John Webster: Thank you.

SM: So, when are you guys just gonna bypass me altogether and just start your own spin off real estate podcast? Just the two of you.

JW: As soon as we can get into our own studio, I think that we’ll be good to go.

SM: [laughs] Good. You don't need me at all at that point.

JW: Yeah, no.

SM: Excellent. Before we get into a more in-depth chat, I just want to have both of you give me a snapshot of the spring ‘22 housing market. Just one sentence. What's the headline from where you sit? Let's start with you, Farah.

FO: I think the headline right now is that things are pointing towards more heat as we enter the spring season, with the expectation of more listings hitting the market and more buyers rushing to lock in rates before the expected rate hikes by the Bank of Canada are felt through the system.

SM: Okay, so a hot spring season.

FO: Yes.

SM: How about you, John?

JW: I think in the spring market, Stephen—we're still in a very strong cycle of demand, but there is the anticipation of rate increases and with that anticipation, there's a number of people who may have been sitting on the sidelines waiting to make a purchase or a step-up purchase and I suspect that we'll see in the spring market a pull forward of that demand.

SM: Okay, let's go a little bit deeper. I mentioned the recent data with the average house price. Can you give us an idea of how the market has looked the last few months and what buyers are facing out there in the coming ones?

FO: Sure thing. Sales have been relatively flat over the past four months with small increases since the large gain that we saw in October. However, during the last couple of months of relatively small increases in sales, listings have fallen by a lot. Which suggests that sales have been largely held back by this decline in listings and that is why we expect more heat in some local markets as we enter the spring season and more listings hit the market. As of January, which is the last month we have data for at the time of this recording, sales rose by 1% compared to December, which is a relatively small increase. But during that same month, listings fell by 11%. So, this significantly larger decline in listings brought the sales to new listings ratio—which is an indicator of how tight the market is—up to almost 90%. Which is on par with the highest level ever recorded for this measure and is significantly higher than the long term average of 54%. So, with this tightness, despite the relatively small increases in sales, there's still upward pressure on prices. And in fact, the price increase in January was the highest monthly price increase ever recorded.

SM: Is the phenomenon you're describing of relatively few houses on the market something that's taking place nationally or is it primarily in, you know, what we look at as the main hot markets; Vancouver, Toronto?

FO: The trend that we're seeing in listings where they've fallen over the past couple of months is broad based and definitely more broad based than the movements that we're seeing in sales.

SM: John you have your finger on the pulse at ground level. How do you see the coming season shaping up? And do you have any insight into why those listing numbers are so low at this point?

JW: Yeah, I think that we need to take a step back and look at what drives that demand and it’s household formation, record levels of immigration combined with ultra-low interest rates that have continued throughout the pandemic. What we also have witnessed during the pandemic is with the various variants as they surge, you end up with lower listing activities because people are not as comfortable to list their house. And also with the price acceleration, some people adopted a wait-and-see approach. So, listings have been down, but that's typical at this time of the year. February, which we just finished is the lowest month for mortgage activity seasonally. But notwithstanding that—Stephen—we've experienced throughout the pandemic and this year, double digit growth in mortgage origination and the strength of that market continues. It’s notwithstanding the lack of listings, there's more demand for mortgages than there was a year ago. So, that market is still reflecting that strong demand. We've got record levels of immigration, more to follow. We've got millennials who really do value home ownership and are looking at these rates and saying, ‘I think I should make a decision not to pay rents which are also increasing and look for an opportunity to buy in the market.’ So, the combination of that demand being pulled forward with the anticipation of rate hikes, I think will continue to lead to a very strong spring market.

SM: Okay, you mentioned a couple—well actually, several—of the factors there that are driving demand. One is that record low interest rates over the last couple of years have helped a lot of people want to get into the market. Those rates have started to head up again and I assume will eventually have an impact on prices as rates increase. Farah, can I start with you? What is your team's forecast—the economics team at Scotiabank—what are you forecasting in terms of interest rates for the rest of the year? We saw a small increase in February. What's coming next?

FO: You are right. A big driver of the housing rally has been low and accommodative rates and in fact when the bank didn't raise its rate in January, like everybody had expected it to, it likely extended the lifeline for the housing rally to continue and got more people to rush into the market in February. Now, the bank did raise its rate this month, but this hike of 25 basis points is unlikely to have an impact on housing prices because with it rates remain very low and the marginal impact on monthly mortgage payments is negligible. Our team is forecasting a series of rate hikes through this year and next and we are expecting the bank to hike until it reaches 3% at the end of 2023. So, we have revised up our rate forecasts from our most recent one and this series of rate hikes have a better chance of eventually cooling the market by alleviating some of the demand.

SM: That seems like a lot of increasing over the course of less than two years from, I guess we started the year at .25% is that right?

FO: Yes, we did. And as of March of 2022, we are at 50 basis points. So those are a lot of increases. Yes.

SM: So, John these are the specifics that people really care about when they're thinking about either getting into the housing market for the first time or maybe they have a mortgage renewal coming up sometime soon. It's all about the interest rates. .5% right now is the Bank of Canada rate. The big question for everybody going forward with all these anticipated increases: fixed or variable. So, can you give us maybe a brief explanation of what your guidance is around that in this sort of volatile rate environment?

JW: Whether you're a current borrower or a prospective homebuyer, you're concerned about that increasing rate scenario. The reality is that we qualify people today at the Bank of Canada qualifying rate which is five and a quarter and so a number of people will continue to qualify and the payment impact, the shock of that increased rate isn't really felt. But people are concerned about whether they should stay in their variable, which is considerably lower still today than say, the most popular term—five- year fixed. That's the behavior that you will witness from consumers moving forward in our borrowers. They're going to say, ‘when should I convert from variable to fixed?’ In our STEP products—Scotia Total Equity Product—that we have, you can convert at any time in our variable to a five-year fixed. So, I think that what you'll see is as we move forward towards the latter half of this year, borrowers choosing who want certainty of payment, moving from the variable to the fixed. The delta between the two is still quite wide. But the reality is that that will narrow in the coming months and over the next year and a half. So, you'll see that movement and you really want to think about that as a first-time buyer. Typically, I would recommend look at your fixed payment with a five year and say I'm going to manage to that budget. But, if you're in a variable currently, you're going to be watching very closely to see, ‘when should I make the move?’ But the psychology for the borrower and the home buyer is very similar. The prospect of rising interest rates given that we've been at this low—sort of—zero level for so long is something that a whole group of people who have purchased or who have taken out mortgages aren't as familiar with. But typically, historically the behavior is they look at the shape of the yield curve with the long end rising and they'll start to lock in.


SM: Sorry, just to clarify a little bit. You mentioned that when you're originating a mortgage, the people applying for it have to be able to meet the Bank of Canada qualifying rate of five and a quarter percent. What does that mean, exactly? They have to be able to show that they could make payments on a mortgage even at five and a quarter percent?

JW: So, the way that it works is Stephen, that it's your contract rate plus 2% or the higher of that and the Bank of Canada qualifying rate. The Bank of Canada qualifying rate was raised

last year and it went from 4.79 to 5.25. So, we've been qualifying all of our current borrowers at five and a quarter, even though the contract rates might be two or less than 3%. And the logic behind that by the regulators is to say that that insulates borrowers, so we qualify them as if the contract rate was five and a quarter.

SM: Alright, that makes sense. One other question just for—especially new people getting into the market—with prices inexorably going up in a place like Toronto, it seems like you can't buy a house for $1 million. How are younger people managing to do that and get into the market or are they not?

JW: You're right. The price point in all of our major urban markets has moved up considerably. It's not just a Toronto phenomenon. It's not just a Vancouver phenomenon. And in fact, during the pandemic, as we talked about last time, we witnessed it in recreational properties and people driving till they qualified. The issue for them is do they have the down payment? So, it's the bank of Mom and Dad has come into play. There's been the talk about a number of investors and whether speculators have impacted the market. But the reality is Stephen, on affordability that we're just not building enough housing units. We just don't have enough supply to meet the demand.

SM: Farah, the Scotiabank economics team has done a lot of work on this part of the issue.

Can you give us a bit of an idea of the scale of the problem in Canada?

FO: So, there are many ways to try and put a magnitude on the issue of supply shortages in Canada, none of which are perfect to be honest. However, one way we try to contextualize

the issue is by calculating the ratio of homes to population, which has fallen in the past five years from 2016 to 2021 at the national level and in most provinces and largest cities. We also compared that ratio in Canada to that of other G7 countries and found a very large gap. We calculated that for Canada to only reach the G7 average, we need an additional 1.8 million homes. To give some perspective, we have been completing, on average, 180,000 homes a year for the past 10 years. So, at that pace, to reach the G7 average, we need about 10 years,

and that's assuming that the population doesn't grow, which it most certainly will. Another measure is the rate of completions of homes to population change. And that ratio has been falling below its long-term average since 2014, which is when we began seeing stronger inflows of immigration. Now, the ratio has picked up recently since the pandemic because of the initial halt to immigration and population growth and because of the strong year that starts have had in 2021. But this is unlikely to continue, especially given the significant labour and supply shortages in the construction industry that have long impacted Canada's ability to build homes and keep up with population growth. Now, the Federal Government last month raised its immigration target for 2022, and while strong immigration has been one of the drivers of the market’s imbalance between supply and demand, it seems that the Federal Government is pursuing a more targeted approach this year, where it is allocating more than half of the spots to people that will fill job vacancies. And this more targeted approach might in fact help alleviate some of these supply-demand imbalances, particularly if focused on skilled trade workers. And the Federal Government does have a responsibility when setting

such ambitious immigration goals to take into account these factors to determine the appropriate numbers of newcomers to balance between their housing needs and their contribution to increasing housing supply and to also increase its investment in infrastructure and homes.

SM: Right, so, lots of different factors going into the supply shortage, including to some extent a lack of skilled labour to actually build the houses that we need. Recently, the Ontario government convened a task force on housing affordability—which was actually chaired by Jake Lawrence, a Senior Executive here at Scotiabank—to look at the issue and what the province could do to try to address the housing affordability. It made a whole bunch of recommendations, but one of the main themes was the need to increase the density of housing in our cities. So, more people living in the amount of space than they currently are. In Toronto, something like 70% of the city is zoned just for single family residences. So, John I'd like you to talk about this task force, what your thoughts were about it. Is the density issue one that exists elsewhere in the country, I'm sure it's not just an Ontario phenomenon. And what are your thoughts more broadly about what this task force has recommended?

JW: Stephen, the need for intensification, greater density exists right across the urban landscape in Canada. And the recommendations which I thought were very strong by Jake Lawrence's Housing Task Force could easily be followed in any of the jurisdictions. You absolutely highlighted the major issue, which is that too much of the land available for expansion is dedicated to single family dwellings. There's just not enough density to accommodate the growing populations. And the reality is that the urbanization of Canada and in other countries continues. Notwithstanding what took place in the pandemic with people moving further afield. The reality is that people tend to move to the cities, particularly new

Canadians when they come here. And our planning laws are outdated. They’re too slow. We need more density. We need it quickly. Local interest, NIMBYism, trying to preserve the character of the neighbourhood from 50 years ago, was getting in the way of us providing efficient supply in our urban footprints. But the planning process needs a major overhaul. There's a number of measures that are the subject of the recommendations in that report

that need to be followed and implemented and it's going to take the willpower of all three levels of government. Municipalities are choking on requests for intensification, and they can't deal with it. Whether they're the larger urban municipalities or the more suburban ones, they're all faced with this issue. So, we need desperately in this country to streamline the planning and approval process with an end goal of adding more dwelling units. We saw the building up in most of our cities in terms of the condominiums that have been built over the past 10, 15 years. Particularly in our cities, we need to get much, much more creative about how we add space for people to live in and work in. And there's some really interesting and unique recommendations in that report. I would recommend it to all of our listeners.

SM: Okay, we’ll put up a link to those recommendations in the description and on the Perspectives page. I think we could probably do a full episode just on that task force and its recommendations. But, we will wrap it up here. Can I get a quick last word from each of you? What's the outlook for the rest of 2022? Farah?

FO: I will say the outlook for the year is a hot housing market buoyed by both shortages of supply and low and accommodative rates. Alongside other factors, of course. Such as investor activity and strong immigration and economic growth and recovery. However, an expected series of rate hikes by the Bank of Canada this year and next should help cool the market alongside efforts by different levels of government focused on addressing the supply issue.

SM: Okay. So, John at least in the short-term scared buyers and sellers licking their chops. Is that what you see?

JW: Well, let me parse that in two. I think that looking ahead, rising interest rates won't have

the immediate impact to dampen down demand. There's still lots of room to go before I think that it has any meaningful impact on demand. In terms of sellers—sure—people will say, ‘well, look at the appreciation in my home, look at the additional equity I've been able to achieve through home ownership.’ The challenge is you have to live and buy somewhere else. And I think people have been challenged with that as they sold their existing dwelling—their existing home. They found it difficult to find a replacement because you have to live somewhere and the price appreciation has impacted all of the markets, not just our major urban ones. I think the other issue is that people forget that boomers like myself are living longer and staying in their homes longer than anyone expected. So, you're not having that turnover of existing inventory. I think that as we move forward, we need to have a comprehensive strategy that addresses affordable housing that is subsidized, the rental stock, what we need to do to meet that G7 target and how we can meet the biggest demand in our larger centres. That's what we need to address with much more creative approaches to how we live going forward.

SM: Okay. I think we'll leave it there. Farah, John—thanks so much for joining us again. We really appreciate you taking the time.

FO: Thank you.

JW: Thanks for having us.

SM: We've been speaking with Scotiabank Economist Farah Omran and John Webster, Scotiabank's Head of Real Estate Secured Lending.