Canada Housing Market Outlook: A Farewell to Easy Lending

ANALYSIS Prepared by Andres Carbacho-Burgos [email protected] Economist Contact Us Email [email protected] U.S./Canada +1.866.275.3266...
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ANALYSIS Prepared by Andres Carbacho-Burgos [email protected] Economist

Contact Us Email [email protected] U.S./Canada +1.866.275.3266 EMEA +44.20.7772.5454 (London) +420.224.222.929 (Prague) Asia/Pacific +852.3551.3077 All Others +1.610.235.5299 Web www.economy.com www.moodysanalytics.com

Canada Housing Market Outlook: A Farewell to Easy Lending Introduction The new mortgage lending regulations put in place by the Department of Finance in October have significantly slowed the near-term outlook for housing values. House price growth in Canada was already likely to slow down, but the new rules increase the drag on housing demand and will lead to a pronounced slowdown in coming months, culminating in a mild decline for the national index and in a slower overall outlook than the September forecast for Brookfield RPS house prices. Over the coming five years, house prices in Vancouver will undergo a minor correction and will not completely recover back to their mid-2016 peak, dragged down by the transfer tax on foreign purchases as well as by the new regulations. House prices in Toronto will slow, though they will still rise faster than those in most other metro areas. Effects on other Canadian metro areas will range from significantly slower house price growth to a worse correction, in particular for Alberta and Saskatchewan metro areas such as Edmonton and Regina. There will also be significant downside risks given that it is not completely certain how many potential buyers will be pushed out of the market by the new stress tests, and this lack of clarity will also pull down asking prices by sellers.

MOODY’S ANALYTICS

Canada Housing Market Outlook: A Farewell to Easy Lending BY ANDRES CARBACHO-BURGOS

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mbalances in Canada’s housing market have come to a head, at least in terms of policy. With the exception of Vancouver, whose housing market is now slowing due to a new transfer tax on foreign purchases, all of the imbalances evident earlier this year persisted at best and increased at worst during the past four months. Most of the regional divergence thus far has been driven by wealth inflows—often from international sources—into specific markets, with Toronto and Vancouver being the most prominent. Simultaneously, low oil and commodity prices over the last two years have put downward pressure on the housing market in the inland provinces of Alberta, Manitoba and Saskatchewan. The runup in Canadian house prices since early 2015 has not been the result of low-quality mortgage lending; the percentage of residential mortgages is currently below 0.3% and is at a cyclical low. However, the Canadian authorities feared a deterioration in mortgage debt performance if there were to be a substantial increase in mortgage rates. The consequence of this apprehension is the series of mortgage lending rules enacted by the Department of Finance in October. Though the full effect of these rules has yet to be felt, they have substantially changed the house price outlook, leading to significantly slower house price growth over the next three years, and even to a slight projected national house price decline in 2017. However, this slowdown will not be distributed evenly, and those Canadian metro areas that have less access to wealth inflows— mainly in the inland provinces of Alberta, Manitoba and Saskatchewan—will do less well over the next three years.

Recent Performance The house and condo apartment price trend over the past three years shows that Toronto and Vancouver have left the rest of the country behind in terms of housing valuation (see Chart 1). However, circumstances were already conspiring to pull house prices downward even before the Department of

Finance’s intervention. Vancouver’s price for one quarter, the horizontal axis measures growth was already slowing because of house price growth for the year, and the anticipation and then implementation of area of each bubble is proportional to total British Columbia’s 15% transfer tax on the households in the metro area. Between July purchases of Vancouver homes by foreign and October, Vancouver has slipped because residents, as well as stronger regulation of of the combined effects of BC government the Vancouver realtor industry. Further east, intervention and reduced affordability for house prices in Calgary and Edmonton have domestic residents. Toronto house prices are already gone through a mild downturn as a still rising strongly but have started to decelresult of two years Chart 1: Toronto and Vancouver Break Away of low oil prices, which have reduced Brookfield RPS composite house prices, Jan 2010=100, SA 175 drilling and energy Toronto industry incomes. 165 Montreal Charts 2 and 3 Vancouver 155 Calgary show the recent 145 Edmonton dynamics of house Canada 13-metro composite 135 prices in the 13 Ca125 nadian metro areas 115 that make up the 105 Brookfield RPS composite index. The 95 10 11 12 13 14 15 16 vertical axis measures Sources: Brookfield RPS, Moody’s Analytics house price growth 1

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Chart 3: …But Are Starting to Slow Down

Composite index, 1-yr vs. 1-qtr performance, 3-mo MA

Composite index, 1-yr vs. 1-qtr performance, 3-mo MA

Improving

Improving

40

Toronto

25 Halifax

20

Winnipeg

15

Calgary

10

Regina

Québec & Nova Scotia

5

Edmonton

-10

Contracting-5

Vancouver

British Columbia

Montréal Québec

0

-5

Victoria

Ottawa

0

5

10

Saskatoon

20

Regina

25

30

35

Slipping

*Bubble size indicates # of households

erate. House price growth in the metro areas in Alberta, Manitoba and Saskatchewan has started to pick up in the past few months, but prices are still down year over year for Calgary and Edmonton and have increased only mildly for the other three. Slowing house price growth so far is due mainly to decreasing affordability and the anticipated effects of policy interventions, not to a macroeconomic decline in demand. The Canadian Real Estate Association indicates that though seasonally adjusted sales slowed slightly from April to August, they climbed in September and October and are still on an upward longterm trend, having passed 540,000 annualized sales. So the current slowdown is not due to a business cycle downturn but to the combination of falling affordability and government moves to prevent a housing bubble that could create financial damage if it were to burst.

Expanding

Toronto

Halifax

15 Prairies

Ontario Ottawa

10

Victoria

Winnipeg Calgary

5

Edmonton

-10

Québec

-5

Contracting

British Columbia

Montréal

0

15 20 % change yr ago

Sources: Brookfield RPS, Moody’s Analytics

25 Hamilton

Ontario

30

Prairies

Expanding

Hamilton

35

Annualized quarterly % chg

Annualized quarterly % chg

Chart 2: Vancouver and Toronto Are Outliers…

0

5

Saskatoon

10

Sources: Brookfield RPS, Moody’s Analytics

Affordability is a good yardstick for future demand, but the ratio of income to mortgage servicing is only part of the story. The Moody’s Analytics forecast model for the Brookfield RPS house price indexes compares current house prices to long-term trend prices, which are influenced by income, population size, the overall new house and land price index, and for a few metro areas, the deflated stock market price index as a proxy for wealth. The divergence between the current price and this long-term trend price determines the degree of over- or undervaluation, which is an important driver of the house price forecast. For geographies with highly overvalued housing, house price growth will soon start to slow because of a combination of reduced affordability, excess construction, and a possible decline in mortgage debt performance leading to distress sales. Highly undervalued metro areas are

15

20

25

% change yr ago

-5

Valuation

Vancouver

Québec & Nova Scotia

30

Slipping

*Bubble size indicates # of households

likely to have a wave of opportunistic purchases, either to flip dwellings or to make them available on the rental market, with resulting appreciation as such purchases start to act on a limited supply of homes. Charts 4 and 5 show the current valuation for single-family homes and condo apartments in the top five metro areas by population, which has not changed substantially in the past three months. The imbalance for single-family homes is immediately apparent in Toronto and Vancouver. The main determinant for the long-term trend value of singlefamily homes is real median family income, supplemented with the stock market index as a proxy for wealth. But capital inflows into both metro area housing markets have pushed house prices well above their longterm trend value. Fewer such inflows are disturbing the housing markets of Calgary, Edmonton and Montreal, which are approximately correctly valued, though slowing

Chart 4: Is Vancouver Dangerously Overvalued?

Chart 5: Apartment Valuation Is More Moderate

Brookfield RPS house price, s-f detached, % deviation from trend

Brookfield RPS median condo apt. price, % deviation from trend

70

Vancouver

60

Montreal Toronto

5

30

Toronto

0

Edmonton

Montreal

-5

0

Calgary

-10

-10

-20 05

06

07

08

09

10

Sources: Brookfield RPS, Moody’s Analytics

2

Edmonton

10

40

10

Vancouver

15

50

20

20

DECEMBER 2016

11

12

13

14

15

16

Calgary

-15 05

06

07

08

09

10

Sources: Brookfield RPS, Moody’s Analytics

11

12

13

14

15

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house price growth is moving all three markets toward undervaluation. By contrast, the main driver of the longterm trend price for condo apartments is real average per capita disposable income, which tends to be much higher than median family income.1 As a result, valuation for condo apartments in all five metro areas is within 10% of the long-term trend price, though condo apartments in Vancouver have appreciated significantly over the past three years. Overall, the main danger of a housing bubble is for single-family homes in or near the Vancouver and Toronto metro areas. Fortunately, the macroeconomic picture is more moderate at least in the near term.

The macroeconomic forecast The three main drivers of house price valuation that are affected by changes in macroeconomic conditions are per capita disposable income, the supply price as proxied by the new-home and land value price index, and the deflator for consumer spending. Of these three, the third is the default trend measure: If all other macroeconomic drivers are unchanged in the forecast model using Brookfield RPS house price indexes, house prices will trend upward at the rate of consumer price inflation. In the past few years, macroeconomics have been fairly stable compared with the wide swings of the previous decade. Per 1

Presumably, a substantial share of demand for condo apartments comes from nonfamily households, which is why median family income is not used to determine the long-term price trend for condo apartments.

Chart 6: Inflation, New-Home Prices Are Subdued capita disposable Canada macroeconomic indicators, % change yr ago income growth has 12 averaged slightly New-home and land price index over 2% per year 10 over the past five 8 Per capita disposable income years, whereas 6 consumer price 4 inflation has aver2 aged around 1.5% 0 per year (see Chart Deflator, private consumption -2 6). Growth in -4 the national new 05 06 07 08 09 10 11 12 13 14 15 16 house and land Sources: Statistics Canada, Moody’s Analytics price index has started to pick up over the past year, but is now only at about areas such as Toronto this dynamic may 2.5%, well within safety margins. For Canada be reversed. Third, real per capita income as a whole, residential construction will run growth will come in at more than 1.2% for slightly ahead of household formation over the next three years before slowing, doing the next few years, putting downward presits part to maintain affordability. Lastly, no sure on new-home prices. recession in the form of a significant increase The main base case assumptions for the in the unemployment rate is in the offing for macroeconomic forecast for Canada, includthe baseline outlook. ing the Brookfield RPS national indexes, are The last item that stands out is a subshown in Table 1. A few important items stantial slowdown in the growth rate of the stand out. First, the Bank of Canada will Brookfield RPS national house price indexes, tighten policy rates over the next three to even straying into a slight correction in 2017. four years, and this tightening will extend Besides single-family house price overvaluto mortgage rates, slowing down house ation for the two largest metro areas, the price growth independently of other policy slowdown is due to the effects of significant changes. Overall, the five-year adjustable government intervention. mortgage rate will gain more than 200 basis The ax falls points over the next three years. Second, residential construction will slow but will Concern about rapidly inflating house keep slightly ahead of national household prices and escalating household debt burformation, which will also act to slow prices, dens prompted the Department of Finance though in some of the fastest-growing metro to enact new mortgage lending rules that 6

Table 1: Canada Housing Market, History and Baseline Forecast Detached single-family house price index, % change * Condo apt. price index, % change * Composite house price index, % change * Real per capita income, % change Unemployment rate, % Avg mortgage rate, 5-yr, % Housing starts, ths % change Ratio, median dwelling price/median family income Ratio, outstanding mortgage debt/disp. income

Most recent 11.2 6.1 10.8 0.5 7.0 3.67 198.7 -5.6 6.9 1.1

* Fourth quarter, year over year Sources: Brookfield RPS, Statistics Canada, CMHC, Moody’s Analytics 3

DECEMBER 2016

2014 4.4 3.4 4.5 0.5 6.9 4.08 189.0 0.6 6.0 1.1

2015 6.7 4.0 6.0 1.5 6.9 3.77 194.1 2.7 6.2 1.1

2016 10.5 5.8 10.3 0.4 7.0 3.71 196.0 1.0 6.8 1.1

2017 0.2 -0.6 -0.2 1.2 6.7 4.09 192.7 -1.7 6.9 1.2

2018 0.7 0.3 0.4 1.5 6.6 5.02 186.0 -3.5 6.7 1.2

2019 1.4 0.9 1.1 1.3 6.6 5.66 178.3 -4.1 6.6 1.2

2020 1.9 1.4 1.6 0.7 6.7 5.88 175.7 -1.4 6.6 1.3

2021 2.2 1.7 1.9 0.7 6.6 6.05 175.7 -0.1 6.6 1.3

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took effect in October. The main objective is to reduce downside risk by culling borrowers who would be vulnerable to higher mortgage rates as well as to place limits on purchases that are financed by capital inflows rather than mortgage lending. A quick summary of the changes to the mortgage lending rules runs as follows. The first and probably most important change is to require all applicants for federally insured mortgages to undergo a stress test in which they have to qualify for a mortgage loan under the five-year fixed mortgage rate posted by the Bank of Canada, which is substantially higher than the negotiated rate; the stress test is plausible given that most mortgage lending is variable-rate, making borrowers potentially vulnerable to increased rates; previously, this requirement was in place only for borrowers with high loan-tovalue ratios who could not afford a large down payment. Also, the stress test would include limits on debt service-to-income ratios, including a 39% of income limit on all regular obligations such as mortgage debt service, insurance, and property taxes, plus a 44% of income limit on all debt service, whether or not it is housing-related. The second change is to reduce the vulnerability of federal mortgage insurance by imposing additional limits on insured mortgages even if such mortgages have low loan-to-value ratios thanks to a standard down payment. These limits include a C$1 million house price maximum for such loans, a minimum credit score of 600, a maximum amortization period of 25 years, and an occupation requirement; previously, these limits only applied to insured mortgages with high loan-to-value ratios. While these limits would most likely be binding in the larger metro areas, they are unlikely to have significant effects in smaller metro areas which have lower median house prices and therefore a reduced need for longer amortization periods, while low credit score borrowers in such metro areas are much more likely to need high LTV ratios in the first place. The third change, intended to reduce speculative investment on home purchases, is to require that capital gains on home sales be reported to the Canadian Revenue 4

DECEMBER 2016

Chart 7: New Rules Will Drag on Price Growth Agency. Such capital Brookfield RPS composite price index*, % change annualized gains would not af16 fect the sale of the 14 primary residence, History 12 but would be taxable 10 for sales of second 8 and vacation homes. 6 Also, the capital Sep forecast 4 gains exemption for 2 a primary residence 0 purchase would apOct forecast -2 ply only to individu15 16F 17F 18F 19F 20F 21F als who are already Sources: Brookfield RPS, Moody’s Analytics *National index Canadian residents. Lastly, the federal government and the largest Canadian terventions such as Vancouver’s transfer tax. mortgage lenders will begin exploring ways The Department of Finance’s move to slow of reducing the current 100% federal share mortgage lending would overlap with these of government insurance, so that mortgage existing downward pressures and so will lenders take on a small portion of insurance likely have a weaker than anticipated effect. costs and therefore have an incentive to be This is not to say that the new regulations more conservative in their lending. This last were unjustified. In the absence of such reguelement may take several years for an agree- lations, continued overvaluation in Toronto ment to be reached and implemented, and and Vancouver might well have encouraged so would not directly affect mortgage lendriskier lending in both markets in order to ing in the short term. maintain strong house price growth, not to If only the second and third changes mention the associated realtor commissions to the mortgage lending rules were to imand mortgage lending fees. mediately take effect, the impact would be Chart 7 shows the September and Nolimited mainly to the largest metro areas: vember forecasts for the seasonally adjusted Toronto, Vancouver, possibly Montreal. Brookfield RPS national composite index. The These metro areas have substantial reserves November forecast was produced after the of private wealth and much foreign capital mortgage lending rules changes and incorpoinflows spill over into their housing markets. rates their effects, while the September foreHowever, the mortgage lending stress test cast does not.2 The main difference between will have a more widespread effect, parthe two forecasts is that house price growth ticularly since the smaller Canadian metro falls off gradually in the September forecast, areas, as well as rural regions, are likely to but goes through a much sharper drop in have smaller household incomes that could 2016 and 2017 for the November forecast; lead to larger debt service burdens if interest the revised data for the third quarter indicate rates were to increase. Therefore, the stress that this drop in house price growth may altest is likely to have a more diffuse effect ready have started. that will put downward price pressure even Three years down the line, however, in metro area housing markets that have not Canadian housing markets may well have been subject to speculative excesses. settled down as a result of reduced overThe magnitude of the downward price valuation, less housing-speculative capital pressure is another question entirely. In its inflows, and higher oil prices helping to staSeptember forecast and report, Moody’s Analytics already predicted a perceptible 2 Note though, that other driver changes besides the mortslowdown in house price growth due to the gage lending rules might have affected the house price index forecast. Where house prices are concerned, the most combined effects of overvaluation, a slow variable driver forecast from month to month tends to be oil price recovery, and individual policy inthe relevant mortgage rate.

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MOODY’S ANALYTICS

bilize the Alberta and Saskatchewan economies. Because of this fewer mortgage loans are likely to be rejected during stress tests or be subject to mortgage insurance ceilings, and Canadian housing markets should reverse to a trend index growth rate of 2%.

The regional forecast As described in the September report, metro area house price forecasts have two major dynamic determinants in addition to economic drivers such as average or median incomes, mortgage rates, unemployment rates, and construction relative to household formation. The first is persistence: Strong house price growth in the current quarter will at least partially carry over to the next few quarters as buyers bid against each other for a limited housing supply. The second determinant is mean reversion: the tendency of house prices to converge back to their longterm trend if they are being strongly over- or undervalued. Both persistence and reversion effects tend to vary by metro area. For example, Toronto and Vancouver historically have tended to have weaker mean reversion effects than other Canadian metro areas, but this is precisely because of the lack of any deep house price correction in Canadian housing markets on a par with those of the U.S. in the last decade. In other metro areas with fewer capital inflows such as in Alberta or the Atlantic provinces, mean reversion effects tend to be stronger. Table 2 shows the short-term dynamics of the regional house price forecast, using the median single-family home price recorded by Brookfield RPS. The first column, which has not changed significantly between the September report and this one, is the percentage of overvaluation by metro area. Of the larger metro areas, Toronto and Vancouver are still the most overvalued. Overvaluation has also started to spread to smaller metro areas near Toronto such as Hamilton and Oshawa. Undervaluation is less severe but is perceptible in Calgary and Winnipeg, among other metro areas. The second column shows house price growth in the third quarter of this year, the last quarter with full data. Compared with the second quarter, house price growth 5

DECEMBER 2016

slowed substantially in Vancouver thanks in part to the effects of the transfer tax, while Edmonton and Calgary picked up slightly, but house price inertia has not changed much for the other metro areas. The third column shows average annualized house price growth in 2017, when persistence effects would be more likely in evidence but also where the change in mortgage lending rules would also have the strongest effects. The hits to house price growth are strongest in metro areas that have already been hit by low oil prices: Edmonton and St. John’s being prominent. The worst-hit area is Saskatchewan, where restricted lending will combine with low income growth due to still-low oil and agricultural commodity prices; during the 2017-2020 period, real median family income in Regina and Saskatoon will stagnate at best and fall at worst, dragging house prices down with them. The fourth column shows average annualized house price growth in 2018-2019, when persistence effects from 2016 are no longer evident and the shock from tighter mortgage lending has abated, so that mean reversion and median family income growth provide the main house price drivers. There are few extremes in this column, but Vancouver house prices have started to recover from an earlier mild downturn, as have prices in Montreal. Calgary and Edmonton, though, will still be correcting because of their reduced income growth prospects: Oil prices will recover only gradually, making it more difficult to quickly return oil production and oil-related income growth to pre-2015 rates. Lastly, Table 3 ranks the metro areas from strongest to weakest house price growth, and also compares the September and November forecasts. Average house price growth for Canada in the five-year period of 2017-2021 falls from 2.8% to 1.3% from the September to the November forecasts, but this slowdown is not uniform across all metro areas. For a few medium and small metro areas such as Ottawa and Brantford, house price growth increases slightly between the forecasts. Again, the November forecast incorporates not only the estimated effects of the new mortgage lending rules, but also significant changes to regional economic drivers

between September and October. For example, the residential construction forecast for Barrie improved significantly between September and October, considerably pulling down its projected house price growth between the two forecast vintages. House price growth in Toronto will still lead the country, and has had only a minor slowdown between the two forecasts, for three reasons. First, higher median family income relative to median prices in Toronto will minimize the effect of the new mortgage lending stress test. Second, Toronto’s mean reversion effect will be much slower despite overvaluation, in line with previous historical data. Third, Toronto will continue to have significant capital inflows, and unlike British Columbia, Ontario has not passed any laws to restrict foreign house purchases. Because of this, Toronto and nearby smaller metro areas will continue to show good house price growth, and will in fact prevent the Canada national index from registering a decline.

Risks The standard alternative scenarios for Canadian house prices, described in more detail in the September report, now incorporate the effects of the new mortgage lending rules as well. In addition, it is worth mentioning other sources of downside risk, though these may not be incorporated in downside scenarios. The first set of risks is due to uncertainty not about the mortgage lending rules themselves, but about how potential buyers and possibly homebuilders will react to the changed mortgage lending environment. It is possible, though not likely, that a much larger number of potential buyers, even in Toronto, are hamstrung by the new mortgage stress test than previously thought, which would not only put downward pressure on house prices—the intended effect— but also substantially reduce home sales and construction. Another possibility is that the new capital gains reporting rules, as well as the transfer tax in Vancouver, restrict high-tier demand to the point where a significant number of developers or temporary buyers find themselves unable to sell homes at a high enough

MOODY’S ANALYTICS

Table 2: Canada Subnational Forecast, Median Detached House Price % deviation from trend price, 2016Q3* Canada Alberta Calgary, Census metropolitan area Edmonton, Census metropolitan area British Columbia Abbotsford, Census metropolitan area Kelowna, Census metropolitan area Vancouver, Census metropolitan area Victoria, Census metropolitan area Manitoba Winnipeg, Census metropolitan area New Brunswick Moncton, Census metropolitan area Saint John, Census metropolitan area Newfoundland and Labrador St. John’s, Census metropolitan area Nova Scotia Halifax, Census metropolitan area Ontario Barrie, Census metropolitan area Brantford, Census metropolitan area Greater Sudbury, Census metropolitan area Guelph, Census metropolitan area Hamilton, Census metropolitan area Kingston, Census metropolitan area Kitchener, Census metropolitan area London, Census metropolitan area Ottawa-Gatineau, Census metropolitan area Oshawa, Census metropolitan area Peterborough, Census metropolitan area St. Catharines-Niagara, Census metropolitan area Thunder Bay, Census metropolitan area Toronto, Census metropolitan area Windsor, Census metropolitan area Prince Edward Island Quebec Montreal, Census metropolitan area Quebec, Census metropolitan area Saguenay, Census metropolitan area Sherbrooke, Census metropolitan area Trois-Rivieres, Census metropolitan area Saskatchewan Regina, Census metropolitan area Saskatoon, Census metropolitan area

-10.3 1.1 10.4 3.7 66.5 6.2 -11.1 -9.4 -8.6 3.2 -2.0 19.9 15.2 13.7 13.2 33.0 -3.4 11.5 7.7 1.9 40.2 3.5 8.3 21.8 36.5 -7.4

1.2 15.0 5.4 -7.6 12.9 7.5 -9.0

% change annualized, 2016Q3 9.9 0.0 1.7 -2.2 12.8 22.7 20.2 13.8 15.1 2.9 3.1 7.2 -6.8 12.5 -0.4 0.4 6.0 8.0 14.5 19.7 14.7 8.0 14.5 14.7 10.3 12.3 5.0 20.1 7.8 11.1 16.4 3.8 16.6 19.1 0.2 3.9 3.3 2.3 0.5 2.0 32.1 3.0 10.2 -0.6

Italicized metro areas are part of the Brookfield RPS 13-metro area composite index. *Census metropolitan areas only Sources: Brookfield RPS, Moody’s Analytics

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DECEMBER 2016

Avg annualized house price growth, %, 2016Q4-2017Q4 0.2 -0.4 2.3 -4.6 -3.0 -1.5 -1.3 -3.9 -1.9 -3.9 -4.9 1.8 2.3 0.3 -4.1 -5.4 0.8 -0.5 3.9 3.9 2.7 -1.8 5.0 4.0 0.9 1.8 -1.4 3.6 5.0 1.8 -0.3 -3.5 5.2 2.1 -0.1 0.1 0.0 -2.2 -1.6 1.2 1.0 -13.4 -16.9 -13.6

Avg annualized house price growth, %, 2018Q1-2019Q4 1.1 -2.0 -1.5 -3.8 0.5 0.5 -0.4 0.5 0.1 -0.2 -0.6 4.0 3.5 4.2 0.3 -0.4 3.1 1.8 2.7 0.9 3.4 -1.8 4.3 3.5 0.5 1.2 -1.0 4.5 3.1 -0.1 -1.8 -2.9 4.6 1.4 1.5 0.6 0.8 -1.1 0.2 2.1 -1.9 -0.7 -3.0 0.5

MOODY’S ANALYTICS

price and have to default on debt payments, leading to financial distress. Although highend markets in Toronto and Vancouver are unlikely to be large enough to lead to any sort of financial tremors at the national scale, such risk, however small, is inherent whenever government authorities try to deflate an asset bubble, whether perceived or not. The new mortgage lending regulations may have been necessary, but they are not completely devoid of risk. A less immediate set of downside risks relate to the unexpected electoral shock south of the border. The ramifications to Canadian housing markets of the Trump presidency in the U.S. would be highly indirect, and would relate mainly to the effects of possible U.S. macroeconomic instability on Canada. The most straightforward effect is if a combination of U.S. federal tax cuts and increased spending leads to higher than predicted U.S. interest rates, which would force the Bank of Canada to raise its policy rates more than expected in order to offset downward pressure on the Canadian dollar. Such a higher interest rate environment would drag on Canada’s housing market, adding to the medium-term downward pull from more restricted mortgage lending.

Conclusion The new mortgage lending rules, in combination with significant changes in the regional outlook such as the Vancouver transfer tax and reduced income growth in a few inland metro areas such as Regina, has led to a general slowing of house price growth in the baseline outlook. Several metro areas including Edmonton, Winnipeg and Regina will now undergo extended if moderate house price corrections. Other metro areas such as Vancouver will recover from a short-term demand shock, while a few such as Montreal

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DECEMBER 2016

will experience significantly weaker house price growth without entering a correction. It is mainly steadier income growth, stronger demographics, and continuing international capital inflows that will benefit Ontario, especially Toronto and nearby metro areas. As with the September forecast, there are several unchanged macroeconomic assumptions underlying this outlook. First, mortgage rates start to tighten over the next two years as U.S. and Canadian monetary policy reverts to pre-Great Recession normality. Second, the Department of Finance and the provincial governments do not enact further measures to tighten mortgage lending requirements. Third, oil prices continue to recover but only at a moderate pace, so that Alberta’s economy does not go through a rapid recovery. Fourth, there is no downturn in the European or Asian economies over the next two years. It is yet to be seen how developments in Europe such as Brexit or U.S. developments in the first years of the Trump presidency affect these assumptions.

Table 3: Medium-Term House Price Outlook, Census Metropolitan Areas Avg annualized projected single-family house price growth, %, 2016Q4-2021Q4 Canada Toronto Guelph Ottawa-Gatineau Hamilton Oshawa Brantford Moncton Saint John Sherbrooke Barrie Windsor Halifax Montreal Kingston Peterborough Abbotsford Calgary Kelowna Kitchener St. John’s Saguenay Victoria Vancouver London Trois-Rivieres Quebec Winnipeg St. Catharines-Niagara Greater Sudbury Saskatoon Edmonton Thunder Bay Regina

Sep forecast 2.8 6.3 4.8 2.6 3.6 6.1 2.4 2.3 4.4 3.4 7.5 3.6 3.2 2.3 3.9 4.0 2.3 2.1 1.9 4.6 0.1 0.3 1.8 1.8 2.6 0.8 -0.2 0.2 1.3 1.1 -1.1 -1.0 0.4 -1.5

Nov forecast 1.3 5.1 4.8 4.1 3.9 3.7 3.5 2.5 2.4 1.8 1.7 1.4 1.1 0.7 0.7 0.3 0.3 0.3 0.2 0.0 0.0 -0.1 -0.3 -0.4 -0.7 -0.8 -1.0 -1.2 -1.3 -1.6 -2.2 -2.4 -2.8 -4.7

Italicized metro areas are part of the Brookfield RPS 13-metro area composite index. Sources: Brookfield RPS, Moody’s Analytics

MOODY’S ANALYTICS

About the Author Andres Carbacho-Burgos is an economist at the West Chester office of Moody’s Analytics. He covers the U.S. housing market, residential construction, and U.S. regional economies. Before joining Moody’s Analytics, he taught economics at Texas State University, where he also researched open-economy macroeconomics and income inequality. Born in Chile, he obtained his PhD and Master’s in economics from the University of Massachusetts at Amherst and his BA in economics from Carleton College.

MOODY’S ANALYTICS

About Brookfield RPS Brookfield RPS is a leading Canadian provider of outsourced appraisal management, mortgage-related services and real estate business intelligence to financial institutions, real estate professionals and consumers. The company’s expertise in network management and real estate valuation, together with its innovative technologies and services, has established Brookfield RPS as the trusted source for residential real estate intelligence and analytics. Brookfield RPS is a subsidiary of Brookfield Asset Management Inc. (NYSE: BAM) (TSX: BAM.A) (Euronext: BAMA), which is a global alternative asset manager with approximately $200 billion in assets under management, 30,000 operating employees and 700 investment professionals in over 20 countries. More information is available at www.brookfieldrps.com.

About the Brookfield RPS – Moody’s Analytics House Price Forecasts The Brookfield RPS – Moody’s Analytics House Price Forecasts are based on fully specified regional econometric models that account for both housing supply-demand dynamics and long-term influences on house prices such as unemployment and changes in mortgage rates. Updated monthly and providing a 10-year forward-time horizon, the forecasts are available for the nation overall, its ten provinces and for 33 metropolitan areas, and cover three property style categories, comprising single-family detached, condominium apartments and aggregate, in a number of scenarios: a baseline house price scenario, reflecting the most likely outcome, and six alternative scenarios.

MOODY’S ANALYTICS

About Moody’s Analytics Moody’s Analytics helps capital markets and credit risk management professionals worldwide respond to an evolving marketplace with confidence. With its team of economists, the company offers unique tools and best practices for measuring and managing risk through expertise and experience in credit analysis, economic research, and financial risk management. By offering leading-edge software and advisory services, as well as the proprietary credit research produced by Moody’s Investors Service, Moody’s Analytics integrates and customizes its offerings to address specific business challenges. Concise and timely economic research by Moody’s Analytics supports firms and policymakers in strategic planning, product and sales forecasting, credit risk and sensitivity management, and investment research. Our economic research publications provide in-depth analysis of the global economy, including the U.S. and all of its state and metropolitan areas, all European countries and their subnational areas, Asia, and the Americas. We track and forecast economic growth and cover specialized topics such as labor markets, housing, consumer spending and credit, output and income, mortgage activity, demographics, central bank behavior, and prices. We also provide real-time monitoring of macroeconomic indicators and analysis on timely topics such as monetary policy and sovereign risk. Our clients include multinational corporations, governments at all levels, central banks, financial regulators, retailers, mutual funds, financial institutions, utilities, residential and commercial real estate firms, insurance companies, and professional investors. Moody’s Analytics added the economic forecasting firm Economy.com to its portfolio in 2005. This unit is based in West Chester PA, a suburb of Philadelphia, with offices in London, Prague and Sydney. More information is available at www.economy.com. Moody’s Analytics is a subsidiary of Moody’s Corporation (NYSE: MCO). Further information is available at www.moodysanalytics.com.

About Moody’s Corporation Moody’s is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets. Moody’s Corporation (NYSE: MCO) is the parent company of Moody’s Investors Service, which provides credit ratings and research covering debt instruments and securities, and Moody’s Analytics, which encompasses the growing array of Moody’s nonratings businesses, including risk management software for financial institutions, quantitative credit analysis tools, economic research and data services, data and analytical tools for the structured finance market, and training and other professional services. The corporation, which reported revenue of $3.5 billion in 2015, employs approximately 10,400 people worldwide and maintains a presence in 36 countries. © 2016, Moody’s Analytics, Moody’s, and all other names, logos, and icons identifying Moody’s Analytics and/or its products and services are trademarks of Moody’s Analytics, Inc. or its affiliates. Third-party trademarks referenced herein are the property of their respective owners. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by Moody’s from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall Moody’s have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of Moody’s or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if Moody’s is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The financial reporting, analysis, projections, observations, and other information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell, or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation prior to investing.