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As we roll into the spring, our real estate experts are back to give us their take on the state of Canada’s housing market. Scotiabank Economist Farah Omran and John Webster, Scotiabank's Head of Real Estate Secured Lending, tell us why they’re hesitant to use terms like recovery or stabilization, why supply is still a huge issue, where things may be headed as we go into the busy season and much more.

Key moments this episode:

1:12 — Summarizing the state of the market
3:00 — What does the market look like now compared to pre-pandemic?
5:07 — Are we in a stabilization period now?
7:36 — Is there any light at the end of the tunnel in terms of housing affordability?
13:21 — Where are interest rates headed?
15:15 — How have interest rate rises affected Canadian mortgage holders?
18:58 — Why price declines don’t necessarily help with affordability.
21:57 — Will the new FHSA affect demand?
23:32 — Crystal ball time — what the next six months may look like in the market 


Stephen Meurice: When you talk about the real estate market here in Canada, much like many things in our lives, it seems to break down to pre-pandemic and well, what now?

John Webster: For a very long period after the pandemic, everyone kept thinking that they would be able to reach the prices that were achieved in February of ‘22. That's no longer realistic. And so there's been a bit of a reset.

SM: That’s John Webster, Scotiabank's Head of Real Estate Secured Lending. So, back to that big question – what now? Are we finally seeing a recovery in the housing market?

Farah Omran: For me, I feel uncomfortable describing it as a recovery as much as a reversal of the correction or a premature ending to the correction.

 SM: That’s Scotiabank Economist Farah Omran. She and John are our guests this episode to lend their insights into what exactly is going on right now in the housing market, why supply is still the dominant issue, as well as where we may see things go next.

JW: People thought that this was a correction and then you see February, March, you go, how much of a correction is it really? Or is there more pain ahead?

SM: I’m Stephen Meurice and this is Perspectives. John, Farah, thanks as always for stopping by. I really appreciate you coming.

JW: Pleasure to be here, Stephen.

FO: Thanks for having me.

SM: Farah, we will start with you as usual. Can the current market be summed up in a single sentence. Is there a headline?   

FO: You always ask for too much on this podcast, but there's so much happening with the housing market right now and sending mixed signals that it's hard to sum up in one sentence. I wish I was witty enough to come up with the headline, but I am not. So the last time we spoke was three months ago. And since then we have seen signs of an uptick in sales in Canada's housing market and a decline in listing that is quite significant that is leading to prices being supported, as of last month. But when we do zoom out and look at during and pre-pandemic levels, sales do continue to be below long-term averages having normalized from their super high levels during the pandemic, and prices continue to be much above pre-pandemic levels despite any declines that we've seen since February in 2022.

SM: Right.

JW: Farah’s point’s an important one. February and March, there was an uptick in terms of activity, but we're on historical lows year-over-year. Now, everyone has reverted to measuring housing activity pre-pandemic because the pandemic was so robust. So I think that's a good baseline for us to have the discussion today. Think about where we sit today compared to the pre-pandemic as opposed to those really outsized period of robust activity that took place during the pandemic. But prices did tick up in both February and March, which is the first time, I think, Farah, in 12 months, I believe.

FO: Yeah, the first time that prices have gone up since the Bank [of Canada] started hiking. Particularly for the Home Price Index, the average sales price is more volatile. But for the Home Price Index, last month was the first month it has gone up since the Bank started hiking.

SM: So that's an interesting point you made, John, around what the benchmark is and the benchmark is pre-pandemic. So we're talking about, you know, fall of 2019…

JW: You’re trying to remember when the pandemic started.

SM: It seems like a very long time ago. So what does it look like now compared to then? And are we just taking out those three years as an anomaly when you're assessing the market, Farah?

FO: I would say doing pre-pandemic comparisons are very common when we're looking at the numbers. With everything in the economy, not just the housing market, it actually presents a lot of challenges for forecasting too when people wonder whether they should just remove this period as a very volatile period from any estimations. In terms of the housing market, I always do a pre-pandemic comparison because what we've seen over the last couple of years was not typical of the market. So sales have declined quite below their pandemic levels. But actually, this last month the level of sales for March was in line with what we've seen in 2018 and 2019. So that does point towards a bit of a normalization. Now, it can be argued whether in 2018 or 2019, that in itself was a normal, sustainable level of activity. But certainly compared to the pandemic, it is more sustainable and in line with more normal levels for sales. And in terms of prices, particularly the Home Price Index, which as we know, I think I've gone on a rant about this in the previous podcast.

SM: Feel free to rant again.

FO: I prefer it over the average sales price measure because that one is too volatile and it's not really representative of movements in the market as much. But the Home Price Index, my favourite two points of comparisons for that one is the peak levels, which were February 2022 when the Bank [of Canada] started hiking and then the pre-pandemic levels. So to peak levels, it's down around 15%, but to pre-pandemic levels it's still 30% above them. So I think that's always very important to remember in kind of the fuss of everything that is going on and the media attention and focus on what's happening right now. But prices are quite elevated still and supply is not that strong either.

SM: Right. And when you look at it, John, do you also you kind of set aside the craziness of the pandemic period and look back to pre, now we're getting into a normalization. Do you see us as being in sort of a stabilization period now?

JW: So yes and no. I think the supply-demand imbalance is something that is still a factor in the marketplace. But the other thing I think that Farah pointed out is why are these dates significant? Obviously, during the pandemic, we had the cheapest cost of funds, very, very ultra-low borrowing rates that people got used to for a sustained period. That demonstrates the impact that rising rates have had upon demand. So as rates stepped up, there's two things you got to keep in mind. We talked about this before. So, if we were at a point where five-year, which was the most popular term until the pandemic where variable, became the more popular term as a prime-based product, you saw rates rise to the level of five higher percent. And then don't forget, we had to qualify them 2% above. So then you're qualifying people at 7% and 8%. So that had a big impact on the demand. Because how many people could afford to carry mortgages at those price points, at those elevated rates? So obviously that had its impact just as very low interest rates had its impact and contributed to the house price inflation. What we're seeing now is two things, I believe. There's a pause and, in fact, if you look at it for the period that Farah is describing, February, March, fixed term rates for many lenders came down, even though rates are still elevated and the qualifying rate still applies. Those rates have come down in a number of institutions. I also think that there's been a bit of a level set for the homebuyers and the home sellers. For a very long period after the pandemic, everyone kept thinking that they would be able to reach the prices that were achieved in February of ‘22. That's no longer realistic. And so there's been a bit of a reset. More of that still has to happen because that expectation curve is still high. Whether you're a seller — not so much for the buyers. Buyers have benefited. If you look at where there has been, that I've witnessed, a more manageable decrease in prices, it's been in condominiums in and around that million dollar mark where on a square foot basis for new dwellings that price came down. Single family hasn't really come down very much.

SM: All right. I wanted to ask a little bit about affordability, because if prices are remaining elevated in spite of higher interest rates and, you know, all of the circumstances that go into the prices still feel like they're pretty high. Is there any light at the end of the tunnel around the question of housing affordability in this country?

FO: I mean, that's really when it becomes challenging to discuss the housing market. So you can see in many articles that what happened over the last couple of months is starting to be described as the recovery. And for me, I feel uncomfortable describing it as the recovery as much as a reversal of the correction or a premature ending to the correction. When you look at it in a way that only demand is recovering—

JW: Try to figure out what the difference of that statement is.

FO: [laughs] Well, it's just because when you have one side of the ledger recovering, which is demand, but not the other side, then you're really looking at a situation in which affordability is worsened and whatever new balance that came to the market over the last few months in which it was correcting as we describe it, then we would look at a situation where the additional balance is now going to deteriorate again because supply is not recovering at the same rate that demand is or not at all. Again, in the last two months, sales increased even though listings went down by quite significantly larger amounts, which shot up the sales-to-new-listing ratio, which is the indicator that we look at to assess tightness in the market. And we no longer have any markets in buyer's territory, for example. Now it's either all balanced or sellers’ territory. So I think it definitely goes back to supply being an issue. We haven't seen starts at the elevated levels that we've seen them at over the pandemic in a few months now. Look at Toronto, for example. Unsold inventory is very low. We're seeing months of inventory also reverse a trend of improving. So months of inventory is the number of months that we would run out of inventory at the current pace of selling. That reached a record low of 1.7 months. So it would have taken 1.7 months for the national market to run out of inventory at the pace of sales that we've seen during the pandemic. The long-term average for this measure is around five months. So over the last few months, since the banks started hiking and the market began correcting, that measure was slowly improving and ticking up and up and up until it reached around four months. And the last couple of months have seen it go back down again with a new added tightness to the market.

JW: I think that affordability will continue to be an issue because of the supply-demand imbalance. To answer your question, there has been, I don't know if I would say that there's light, there's been some more light in terms of the supply side, in that there have been a number of initiatives taken by notably B.C. and Ontario to expand the number of dwellings with inside any envelope, whether we're talking about what people used to describe as the granny flats — addition of a rental in a neighborhood where that was not permitted before in Vancouver and Toronto, that's helped. I think if you look at the planning process, there is in Ontario and B.C. a commitment to intensification particularly around transit hubs and allowing more density. And so, people from a planning point of view are getting more comfortable with that and realize that that's a direction that we have to build up. Where there is that transportation infrastructure available, we have to maximize density. I think you've seen some controversy, particularly in Ontario, where the province has intervened directly and said we like the plan, for example, in the region of Waterloo, for intensity, but we want you to release more farmland. And so that's become somewhat controversial from an environmental perspective. But there is a push for new homes to allow more development where that had been precluded before. And there is some lift. The Federal Government has announced this fund, which is available to municipalities that can demonstrate that they've sped up the approval process and they're adding more density. Now, a lot of the municipalities that want to benefit don't know how to access the funds. And so some of those mechanisms haven't really been worked out. But that's what we really needed. We need the federal government to use infrastructure money or something to incent both provinces and municipalities to come to the table, speed up the approval process and also examine the costs that are restricting. We talked about levies before on new construction. They're very, very high in the major urban centers. And yet existing homes’ mill rates are very low. Right. So municipalities say, oh, we need the revenue, and they have put a lot of it, if you talk to the new homebuilders and developers, on the back of that new development. And that's why the numbers are low for that reason, because interest rates are high and also because there's not a lot of skilled workers available to build. But I think you'll continue to see, given the immigration patterns and the number of millennials that still want to buy their new homes, lots of pressure. And you know, if we’re a million and a half houses short for the next ten years in Ontario, just magnify that across the country and you've got — the deficit is impossible currently with what we're doing at all levels of government to make it up. And so affordability, in my view, will continue to be an issue and people will struggle with how do they come up with the down payment. They'll learn to manage the payment. I think that's really the evidence that we've seen during this rising rate environment that people have been able to manage the payment. But in terms of coming up with a down payment, very challenging.

SM: So you mentioned interest rates a couple of times. They're obviously very much at the heart of all these conversations, both from a buyer perspective and I guess from a builder perspective.

JW: A lender perspective, too.

SM: [laughs] And for the builders, it's more challenging to finance new constructions. Farah, can you tell us anything? What's Scotiabank's view about where interest rates are going? We've had a pause for a couple of months, I guess since January, now. Some cautious signals from the Bank of Canada. Where do you think it's headed?

FO: So currently we remain of the view that it will keep at that stable level before declining next year in 2024. Now the bigger question is by how much and how fast would it decline? But it is the case that for this year, we see them staying at their levels rather than declining like the market is pricing in. And that's because we think inflation concerns dominate what the market is responding to by pricing a cut this year. Now, obviously, there are risks to this call, it could be that inflation proves more sticky or if our inflation starts moving in the direction of the US inflation which is, you know, accelerating, their core inflation accelerating. And in that case that might put pressure on the Bank to hike rates instead of keeping it at a pause. But future inflation would guide this decision. But it is the case that cool analysis that was done by members of the team shows that even with the policy rate held stable at its current level, the real rate, which adjusts the policy rate by the inflation rate — so the policy rate is the nominal rate, then the real rate deducts inflation rate from that — and with our forecast of inflation slowing, holding the nominal rate at its current level means that the real rate would still go up a bit and be restrictive through next year. And that rate is what kind of impacts the economy, which is also supporting our decision to keep it stable.

SM: John, you mentioned buyers seem to be able to manage mortgage payments, that it's more of the down payment or the deposit on a home purchase that can be a challenge for people. But given how much interest rates have increased over the last year, what are you seeing in terms of people's ability to actually manage, you know, especially if they have a variable rate mortgage, you know, that's a huge change over a course of the year.

JW: The reason for that was that during the pandemic, as money was very cheap, the variable was that much cheaper than the five-year, which would be the more popular term, particularly for first timers who are trying to manage and say, ‘I know the certainty of my payment over the five-year term’. And that reversed. So historically I told you in terms of our portfolio, 60% of originations would at least be in the five-year, that kind of flipped over and be 20%, 30% at the highest being variable, flipped over. So during that pandemic, when prices were under pressure and rates were very low, people were picking variable because they were getting 1% and 2% mortgages, which was very attractive. Then as rates were stepping up. Those are the people that are most susceptible because their cost of borrowing changes with every prime rate increase. In our case, our variable is really an adjustable. The payments go up as prime went up. And we were kind of the canary in the coal mine at the beginning of the rate increases because people said, ‘Oh, are these households going to be able to absorb this interest rate shock?’ As it turned out, they were. One, because we'd underwritten them at 2% points higher, which OSFI was very willing to slap themselves on the back and say, ‘We protected you lenders from yourselves.’ But that interest rate cushion was effective, and it took quite a bit of time before we were actually having borrowers that were elevated beyond that cushion. But in our case, the variable borrowers have responded very well because our payments went up. Some of our competitors don't have that and that's created a lot of confusion and heartache for borrowers because their payment would stay the same. But if you get to a point where you're not even being able to cover with your payment the interest rate, there's a trigger rate, which means that those payments either have to go up immediately or they then capitalize them to the mortgage. And so what happens to the consumer? They end up paying interest at a much higher level. Their amortization schedule without their input gets extended. So they thought they had a 20 or 25 year amortization. Now they have a 30 or 35 year amortization because of the difference in the payments being added to the principal amount of the mortgage. And so those are difficult things to explain to folks. Thankfully, in terms of our own circumstances, as the payments went up, people have managed. So all lenders took a really hard look at who bought during the height of the market when prices were the highest and rates were the lowest. And are they a vulnerable cohort? In our case, and I think if you look at the delinquencies across the various major institutions, they're still below the pre-pandemic levels. So that's why I say Canadians know how to manage the payment and they obviously would like a lower absolute yield. But the customers that we deal with are pretty savvy about understanding what they have to do. The challenge for new purchasers, and you mentioned affordability, is a lot of their income is having to go to housing and so they don't have a lot of discretionary income after that. And so that's particularly challenging with these high levels of both interest rate and prices. And I think that's a very important point that Farah made is that people thought that this was a correction and then you see February, March, you go, ‘How much of a correction is it really? Or is there more pain ahead?’

FO: Mm hmm. Yeah. And I mean, even with the decline in prices that we've seen since February, that hasn't really had much of an impact on affordability itself because it's been accompanied by increase in borrowing rates that has really offset any improvements to affordability. So the question is now what happened to prices as rates stabilize and potentially decline if prices continue on their correction path? And if the market ignores this last month's uptick? The housing market, I would say, is a very emotional one. So it's one where participants see that prices went up this last month, that in itself can just trigger a reaction of people wanting to join in before prices go back up even more. And that in itself just triggers a rally. But if markets ignored the signal and the buyers continue to demand more reasonable prices, I would say, or prices that reflect what's been happening in the market over the last few months, then when rates go back down, then we can look at a situation where affordability might potentially improve a bit and would release a bunch of pent up demand, as John alluded to earlier, with immigration and population growth. But if markets do see what happened this past month as a dip and want to join in the market before it goes back up, then you're just looking at a situation which affordability has been deteriorating and will continue to deteriorate into the future.

JW: You know, people speculated that there was too many investors in the market and then look at what's taken place since rates went up and that discourages a lot of investors because obviously they're having to reach into their pocket because the rent won't carry the mortgage. So the housing market is all connective tissue. So what we witness where rents have been under enormous pressure because investors backed out of that market and all of the rents have gone up because in Canada, a lot of condominium investors in particular have been providing that rental stock. When rates went up and that went away and buying went down and that put huge pressure on both new condominiums and those that were older. Because there is a difference in terms of selling prices on a square foot basis, but not that big a delta on rental prices. So those rental prices are under pressure. We still don't have a lot of rental-built stock that's proceeding. And so there's a gap there. In terms of speculation around that there was too much investment activity by whether it be foreigners, whomever in the housing market, everyone predicted, ‘Oh, you'll see all these defaults and that will add to the supply. So all these units will come on.’ Well, never happened. So these forced sales by lenders, not happening. Forced sales by investors, not very much. Right? And so I think all of that in the media was exaggerated. And we'll be back here in another four months or in another eight months talking about supply and demand.

SM: Right. From a demand point of view, the federal government has now come out with well, they announced it last year, but the first home savings account. Yet another way that people can save money for a down payment and so on. Does that exacerbate the demand problem by making it somewhat easier for people to potentially get into the market?

FO: I would say any demand-focused measure would exacerbate the problem in this situation. But even then, even the measure announced by the federal government, it's so small relative to where home prices are that it really, I don't see it making much of a difference for buyers. Like it's not going to be the thing that makes the difference between being able to afford and not afford. If it does have any impact, it would be that it exacerbates the imbalance in the market when it's not combined with more measures that focus on more building and more supply.

JW: It's largely cosmetic, right? And a lot of these initiatives that you've seen in the past couple of years really are only going to impact at the margins. They're not going to address the main subject that we're talking about. And I think that when Farah mentioned it's emotional, I think it's important to remember most people, including all of us, are buying a home. They're not buying a house. Or they're renting a home. And you need somewhere to live and you want to like where you live because you spend a lot of time there. So that challenge is going to continue. But it is an emotional experience. People, they tend to fall in love with where they want to live. And it's a good thing because you're going to be there a while and spend a lot of money on it.

SM: Okay. Last question, Farah. I'll come back to you with the same question after, John. But get out your…

FO: Crystal ball?

SM: Your crystal ball. What do the next six months look like?

FO: I decided to actually acquire a mini crystal ball to take it around with me to presentations.

SM: [laughs]

FO: And just like lift it when I get questions about what's going to happen next. But it is honestly quite difficult to guess with certainty what's next. It's been difficult to do so. Like John said, the increase in prices this past month and the increase in sales for the last two months did take us by surprise because we do still see room for prices to decline given how high they are still relative to pre-pandemic. Again, the home price index is 30% above its pre-pandemic level. We still saw room for prices to decline, but even with that additional decline, we weren't seeing them going back below their pre-pandemic levels. They would still be above, but we still see some room for that to correct. However, this past month’s result does reduce our confidence in there being additional declines because again, it could be either that housing market participants process this as a dip and rush back to the market and just reverse the trend of housing prices. And just the past two months have seen so much tightness added to the market, the sales-to-new-listings ratio rapidly increased, and that's typically a leading indicator for home prices. So that does point to potential pressure on prices. And then of course, with the fixed mortgage rates going down, that could all be reasons for prices to just stabilize and go into a different direction as we look into next year, given how we view demand, which is really strong and about to get stronger, the more we have immigration targets that are high and more focused on people arriving to Canada rather than making people who are already here permanent residents. So in the absence of a serious measure to increase supply, it would be that we're looking at a stabilization before an uptick in the housing market.

SM: John, you see things the same way?

JW: As rates go down, demand will pick back up. And I don't think that we have a good answer to house price affordability at this point. We've taken some steps, but we need to take much bolder action, I think. And we you know, we need the levels of immigration. It's not just a pressure point for housing. We need it for the productivity of our country and our economy and growth. And so I hate to think about that in terms of people casting that as a negative, oh it’s creating all these problems for affordability. It's also part of the solution to the growth in this country. And you got to keep that in mind as well.

SM: Farah, John, thanks as always for being here with us.

JW: Pleasure.

FO: Thanks for having me.

JW: And your crystal ball.

FO: And my crystal ball, yeah. It’s essential. [laughs]

SM: I've been speaking with Scotiabank Economist Farah Omran and John Webster, Scotiabank's, Head of Real Estate Secured Lending. The Perspectives Podcast is made by me, Stephen Meurice, Armina Ligaya and our producer Andrew Norton, who knows home is where you hang your headphones.