CANADIAN HOUSING HEALTH CHECK May 2016

Largest four housing markets

Pockets of risks across Canada

Toronto — Resale activity hit a new record-high level in 2015 and the pace remained hectic so far in 2016. Price gains are strong, especially in singledetached segments—which remain in short supply. Healthy condo absorption has mitigated risks that arose following a spike in condo completions in early 2015. Rapidly eroding affordability is a growing source of concern.

 Nation-wide indicators suggest that there is a low probability of a widespread and steep downturn in Canada’s housing market in the next 12 months, although modest deterioration in the labour market slightly increased the odds of such in recent months. Regionally, opposite risks—ensuing from weak demand in some markets (e.g. Calgary) and heated conditions in others (e.g. Vancouver and Toronto)—prevail.

Montreal — Market conditions improved gradually during the past year. Early 2016 results show fairly solid y/y gains in resales and slight acceleration in prices. Newly completed condo units continue to face absorption challenges and still-elevated condo construction levels are a concern. Vancouver — The market keeps on riding extremely high in 2016 after a record-breaking year in 2015 in terms of resales. Prices continue to escalate to never-before-seen levels anywhere in Canada. Affordability deteriorated significantly over the past year for single-detached homes and poses the main risk for the area. Calgary — The provincial recession continues to weigh on housing demand in Calgary and such weakness increasingly undermines prices. The drop in property values has been generally modest to date; however, the pace of decline has accelerated and further downside remains. Strong condo construction raises the risk of a looming oversupply in this segment.

 Oil price shock: The persistence of low oil prices continues to pose difficult challenges to oil-producing provincial economies and their housing markets. This keeps downside risks to housing demand and prices prevalent in Alberta and other oil industry sensitive markets in the near term.  Rising unemployment: Labour market conditions have eroded modestly in Canada since the middle of 2015. While the deterioration has been concentrated in Alberta and Saskatchewan, the jobless rate also crept upward in several other provinces. A rising unemployment rate heightens downside risks for the housing market.  Escalating prices in Vancouver and Toronto: Activity remains very strong in both markets; however, sky-high valuations for single-detached property increasingly defy local fundamentals (especially in Vancouver), thereby raising the risk of over-heating.  Condo building boom: Elevated condo construction poses higher-than-usual risk of overshooting actual demand for occupancy; however, this largely reflects policy favouring higher density development. An earlier increase in the number of completed but unsold condo units is evolving constructively thanks to steady absorption, including in Toronto. Calgary is an exception where unsold condo units are rising rapidly.  Slowing immigration: This emerging risk generally eased in recent months with net migration into Canada bouncing back strongly in the second half of 2015 after it weakened surprisingly between Q4/14 and Q2/15.  Policy risks: Ongoing concerns about housing affordability, government exposure to housing and stability of hot housing markets and the financial system keep policy risks elevated.  Interest rate risk: The probability of an imminent interest rate hike is low and therefore reduced the risk associated with higher rates.

Monitoring dashboard Canada

Vancouver

Calgary

Affordability Resale market balance Rental market balance Interest rates Labour market

Craig Wright Chief Economist (416) 974-7457 [email protected] Robert Hogue Senior Economist 416-974-6192 [email protected]

Demographics New home inventory - singles New home inventory - multiples Homes under construction - singles Homes under construction - multiples Significantly outside historical norms and posing much higher risk than usual Modestly outside historical norms and posing moderately higher risk than usual Within historical norms or not posing any immediate threat

Toronto

Montreal

CANADIAN HOUSING HEALTH CHECK | MAY 2016

Background Canadian Housing Health Check provides RBC Economics’ assessment of key indicators of Canada’s housing market that are deemed to offer early warning of potential imbalances. This monitoring exercise is one of the tools used regularly by RBC Economics to follow developments in this important sector of the Canadian economy. The report focuses on indicators that have been closely correlated (leading or coincident) with housing downturns and significant home price declines during housing cycles in the past three decades or so. While we believe that housing affordability and the sales-to-new listings ratio (and months’ inventory) are the best indicators of market stress and price pressure, respectively, no single indicator provides perfect and accurate early warning signals of impending trouble. Accordingly, Canadian Housing Health Check emphasizes a ‘dashboard’ approach to convey the point that trouble in the housing market can arise from many directions and that it is imperative to monitor the situation broadly. This approach is complemented by a detailed review of individual indicators that includes a graphical depiction of the current situation within a historical context and a brief discussion of the rationale of our assessment.

About the graphics and risk ‘zone’ system The dashboard graphics display the current values of the indicators (dark blue bar) within zones that we consider safe (green), concerning (yellow) or dangerous (red). The width of each graphics represents the range of values posted by the indicator during the past 30 years (or period of time available). The far left corresponds to the safest measure ever recorded and the far right, to the most extreme imbalance reached historically. For most indicators, the left corresponds to low values but for some (sales-to-new listings ratio and net immigration) to high values. The yellow and red zones appearing in dashboard graphics and individual indicator charts generally were determined by analyzing past housing downturns and constitute our estimations of thresholds above (or, in some cases, below) which market imbalances and significant home price declines occurred at the national level in Canada. The yellow zone comprises a range of values that, historically, have been mostly associated with imbalances but not always with housing downturns (i.e. sustained price declines). In other words, these values give somewhat ambiguous and sometimes ‘false’ signals. The red zone, however, comprises values that represent imbalances much more clearly and of larger magnitude. An indicator in the red zone should be considered a source of worry. The farther to the right in the red zone in the dashboard graphics are the values, the more extreme is the imbalance, the more intense is the stress exerted on the market and, ultimately, the more severe the potential correction. The specific rules at the national level are as follows: 

RBC Affordability Measure for the aggregate of all housing types: yellow threshold = 45.7% (0.3 standard deviations above the long-term mean); and red at 49.8% (1.0 standard deviations above the mean).



Sales-to-new listings ratio: yellow threshold = 0.40; and red = 0.35.



Months of inventory: yellow threshold = 7.0; red = 8.5.



Rental vacancy rate: yellow threshold = 3.0% (long-term mean); and red = 3.5% (0.5 standard deviations above the mean).



Real 5-year bond yield relative to trailing 12-month average: yellow threshold = 1.0 percentage point (1 standard deviation above the mean); red = 2.0 percentage points (2 standard deviations).



Unemployment rate relative to trailing 12-month average: yellow threshold = 0.41 percentage points (0.6 standard deviation above the mean); red = 1.0 percentage point (1.5 standard deviations).



Net immigration per 1,000 population: yellow threshold = 6.5 (0.5 standard deviations above the mean); red = 5.0 (0.4 standard deviations below the mean).



Completed and unoccupied units per 1,000 population, singles and semis: yellow threshold = 0.27 (0.3 standard deviations above the mean); red = 0.34 (1.3 standard deviation above the mean).



Completed and unoccupied units per 1,000 population, multiples: yellow threshold = 0.36 (the mean); red = 0.43 (0.9 standard deviation above the mean).



Housing under construction per 1,000 population, singles: yellow threshold = 2.12 (0.5 standard deviations from the mean); red = 2.34 (1 standard deviation from the mean).



Housing under construction per 1,000 population, multiples: yellow threshold = 3.86 (0.5 standard deviations from the mean); red = 4.49 (1 standard deviation from the mean).

The areas shaded in grey in the indicator charts correspond to housing downturns – i.e., periods during which home prices (as defined as average prices of homes sold on the MLS system) fell by more than 5% from monthly peak to trough. It is important to note that the precise timing of these downturns can vary depending on the home price measure used. The grey shaded areas, therefore, should be seen as broad guidelines.

2

CANADIAN HOUSING HEALTH CHECK | MAY 2016

CANADA Affordability

Six-month trend

RBC affordability measure - aggregate

Deteriorating modestly Lo w

High

Existing home market balance Sales-to-new listings ratio

Tightening High

Lo w

Months of inventory

Declining High

Lo w

Y ellow

Rental vacancy rate

Rising slightly Lo w

High

Lo w

High

Demand fundamentals Change in real 5-Year bond yields

Fairly stable

Change in the unemployment rate

Y ellow

Rising modestly Lo w

High

Y ellow

Net immigration rate

Rising Lo w

High

Supply fundamentals Completed and unsold units per capita - singles and semis

Y ellow

Stable High

Lo w

Y ellow

Completed and unosold units

Declining

per capita - multiples High

Lo w

H ousing under construction per capita - singles

Declining slightly High

Lo w

Y ellow

H ousing under construction per capita - multiples

Rising Lo w

High

3

CANADIAN HOUSING HEALTH CHECK | MAY 2016

CANADA Affordability 

RBC affordability measure - aggregate Ownership costs as % of household income, Canada

70 Long-term average

65 60 55



50 45 40 35 30 25 20 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015



Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage

In our view, affordability is the most meaningful indicator of underlying market stress. Other traditional metrics such price-to-income and price-to-rent ratios can be useful guides of market imbalance under many circumstances; however at this juncture, affordability is a superior gauge because it explicitly takes into account interest rates (the other measures don’t), which have been—and, in the near term, expected to remain—abnormally low in Canada. The most recent reading of RBC’s aggregate housing affordability measure (46.7% in Q4 2015) suggests the presence of greater-than-average market stress for buyers in Canada with the situation deteriorating modestly since the spring of 2015. Affordability is most stretched for singledetached home in Canada’s largest markets. Condo affordability (35.2%) is generally quite close to historical norms, which implies little in the way of undue stress in this category. We estimate the ‘danger zone’ for the aggregate measure to be above 48.9% nationally.

Existing home market balance 

Sales-to-new listings ratio Monthly, S.A., S.A. Canada 0.9

Seller's market

0.8 0.7 0.6 0.5



Balanced market

0.4 0.3 0.2

Buyer's market

0.1 0.0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015



Source: RBC Economics Research, Canadian Real Estate Association



Months of inventory Monthly, S.A., Canada 10 Long-term average

9 8 7



6 5 4



3 2 1 0 2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016



Source: RBC Economics Research, Canadian Real Estate Association



Rental vacancy rate %, total CMAs, purpose-built apartment buildings of three units or more, Canada 6 Long-term average

5 4



3



2 1 0 1989

1991

1993

1995

1997

Annual:1988-2010; Semi-annual: 2011-current Source: RBC Economics Research, CMHC

4

1999

2001

2003

2005

2007

2009

2011

2013

2015



The sales-to-new listings ratio is a reliable gauge of the degree of slack or tightness in the resale market. When the ratio approaches, or is above 0.60, the market favours sellers and prices typically rise rapidly. When the ratio approaches, or is below 0.40, the market favours buyers and prices come under intense downward pressure. Anything in between is considered a balanced market and prices tend to rise modestly. Canada-wide, the sales-to-new listings ratio has been entrenched in the ‘balanced-market zone’ since 2010 although it has risen to the upper bound most recently. It stood at 0.64 in April 2016, the highest mark in more than six years. Home resales in Canada were very strong in 2015— the second-highest total on record—while new listings have not kept up with demand. The majority of markets are considered balanced with Toronto and Vancouver (both sellers’ market) bucking the trend. Historically, the largest price declines occurred when the ratio fell below 0.35. The total number of homes for sale expressed as the number of months it would take to sell them at the current pace of sales is another resale market balance indicator. Historical correlation with prices is difficult to establish with precision, however, because the Canadian Real Estate Association has been publishing this indicator only since 2004. Nonetheless, based on what track record is available, we estimate that downward pressure on prices start to build at levels between 7.0 and 8.5 months, and that severe pressure emerges at levels exceeding 8.5. The slowdown in listings amid strong resales since the spring of 2015 reduced the number of months’ inventory in Canada to the lowest level (4.7) in almost six years in the first four months of 2016. This level is consistent with continued price increases. Demand-supply balance indicators for the existing home market, therefore, continue to suggest little in the way of any imminent threat to the stability of the national market. The rental vacancy rate has not correlated very closely with prices historically. However, we believe that the Canadian housing story will be very sensitive to the supply of new units into the marketplace, much of which (almost entirely condos) will be directed toward the rental market. Therefore, this gauge of market absorption in the rental segment should be monitored closely. A main drawback of the vacancy rate as a monitoring tool is that it is published only twice a year (spring and fall) by CMHC. The latest data for October 2015 shows further increase from 2.8% in October 2014 to 3.3% at the national level, which slightly exceeds the long-term average (2.9%). The rise primarily reflected large increases in Alberta and Saskatchewan. We would consider a vacancy rate above 3.5% as a sign of oversupply in the rental space.

CANADIAN HOUSING HEALTH CHECK | MAY 2016

CANADA Demand fundamentals Real 5-year bond yields relative to trailing 12-month average Percentage points, Canada 6

 

5 4 3



2 1 0

-1 -2



-3 -4 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Surges in interest rates have been strongly associated with market downturns and price declines in several housing cycles in the past 30 years in Canada. A 100 basis-point rise relative to the trailing 12-month average would apply intense downward pressure on the market and that a 200 basis point surge would destabilize it and potentially cause a significant price decline. The yield on the five-year Government of Canada bond continued to trend lower in the past year and is currently near historical lows. The real yield was below its 12-month trailing average during most of 2015 but has roughly matched it since October. Interest rates remain a very supportive influence on housing demand in Canada. RBC’s base case interest rate forecast calls for the overnight rate to remain unchanged until Q2 2017 and rise gradually thereafter, and for longer-term rates to increase before then. This scenario would pose limited risks to the housing market in the near term.

Source: RBC Economics Research, Bank of Canada, Statistics Canada

Unemployment rate relative to trailing 12-month average Percentage points, Canada



4



3 2 1

 

-1 -2 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Statistics Canada



Net immigration rate Trailing 4-quarter sum, Canada, per 1,000 population 10

Long-term average

9 8



7 6 5



4 3 2



1 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Similarly, spikes of unemployment have been associated with housing downturns in the past 30 years, although they have tended to lag price declines rather than lead them. We estimate that a 0.25 percentage point increase in Canada’s unemployment rate relative to the trailing 12-month average would stress the market moderately, but that a full percentage-point surge would threaten the stability of the market. The unemployment rate has trended higher since the end of summer 2015, moving above its trailing 12-month average in the process. Such trend now poses a mild, albeit rising degree of risk nationally. That being said, much of the deterioration in Canada’s labour market has been concentrated in oil-producing provinces. Moreover, the rise in the national unemployment rate masks continued gains in employment. It is just that such gains have been weaker than the increase in the labour force. Net immigration into Canada is another indicator that has not correlated closely with housing downturns or price declines historically; however, given the boom in condo construction in major Canadian cities, any sign that the strong inflow of immigrants is slowing would be concerning. The rate of net immigration in Canada (measured per 1,000 population) recently picked up after falling noticeably between Q4/14 and Q2/15 (due in large part to a drop in non-permanent immigrants). The latest rate for Q4/15 rose to 6.1 from a 16-year low of 5.1 in Q3/15. This is still below the 6.5 threshold signalling some degree of vulnerability but well above 5.0 delineating the zone of potential trouble for the market. Further increase in the rate is likely to occur in light of the federal government recently increasing its target for new permanent residents by more than 10% in 2016.

Source: RBC Economics Research, Statistics Canada

Supply fundamentals 

Completed and unsold units - singles and semis Units per 1,000 population, Canada, n.s.a. 0.5 Long-term average

0.4

 

0.3

 0.2

0.1



A telltale of an overbuilt market is the number of units recently completed but remaining unsold. We segment the Canadian market into singles and multiples to identify potential sources of trouble. On the single-family homes side, the stock of unsold units has remained quite stable at 0.22-0.24 units per 1,000 population since mid-2014. There continues to be no signs of any excess supply of new singledetached units in Canada at this stage. If fact, the opposite is the case in several markets where single-detached are in short supply. We would consider the situation concerning at 0.32 units and dangerous at 0.36 units.

0.0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

5

CANADIAN HOUSING HEALTH CHECK | MAY 2016

CANADA Supply fundamentals 

Completed and unsold units - multiples Units per 1,000 population, Canada, n.s.a. 0.8 Long-term average

0.7



0.6 0.5



0.4 0.3



0.2 0.1

On the multi-unit dwellings side, market absorption has been quite solid in the past year, which helped to draw down the inventory of unsold units in Canada. The rate of unsold units eased to 0.33 units per 1,000 population by April 2016, down from a 19-year high of 0.41 units in May 2015. The unsold inventory surged in the early months of 2015 due to a wave in condo completions in the Toronto area. The latest read of this indicator was marginally below the long-term average (0.36) and well below the 0.48 threshold that would signal a high degree of excess. Overall, the inventory of completed but unsold condos evolved constructively in recent months in Canada, thereby lessening oversupply risks.

0.0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

Housing under construction - singles Units per 1,000 population, Canada, n.s.a.



3.5 Long-term average



3.0 2.5 2.0



1.5 1.0

The object of much concern in recent past has been the number of housing units under construction in Canada. We continue to find that little concern of overbuilding is warranted in the single family home segment, where levels remain well below historical averages (when measured on a per 1,000 population basis) with the trend remaining quite stable, if declining slightly. In some of Canada’s largest markets, demand for single family homes significantly outstrips supply.

0.5 0.0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

Housing under construction - multiples



Units per 1,000 population, Canada, n.s.a. 6.0



5.0 4.0



3.0 2.0



1.0 Long-term average

0.0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

6

On the multiples side, however, there is still an historically high number of condo units currently being built. There were 5.7 multi-unit dwellings per 1,000 population under construction in Canada in Q1/16 or just shy of the decades-high of 5.8 units reached during 2014. This level is well into the ‘high risk zone’ (4.5 units or higher). Such high levels of condo construction are concentrated in the Toronto (33% of total) and, to a lesser degree, Vancouver (14%), Montreal (11%) and Calgary (7%) markets. Strong condo construction in large part reflects structural changes that arose from policy (e.g. rules limiting urban sprawl) and affordability (condo apartments are the more affordable housing type) considerations, and therefore, represents a market share gain over single-family homes. Nonetheless, the prospects for high levels of condo completions in the period ahead in markets such as Toronto, Montreal and Calgary maintain above-average absorption risks.

CANADIAN HOUSING HEALTH CHECK | MAY 2016

GREATER TORONTO AREA Affordability

Six-month trend

RBC affordability measure - aggregate

Deteriorating Lo w

High

Existing home market balance Sales-to-new listings ratio

Tightening considerably High

Lo w

Lo w

High

Months of inventory -

Ontario

Declining

Y ellow

Rental vacancy rate

Stable Lo w

High

Lo w

High

Demand fundamentals Change in real 5-Year bond yields

Fairly stable

Change in the unemployment rate

Y ellow

Rising slightly Lo w

High

Y ellow

Population growth

Rising slightly Lo w

High

Supply fundamentals Completed and unsold units per capita - singles and semis

Y ellow

Rising slightly High

Lo w

Y ellow

Completed and unsold units per capita - multiples

Declining sharply Lo w

High

Lo w

High

H ousing under construction per capita - singles

Rising

Y ellow

H ousing under construction per capita - multiples

Declining slightly Lo w

High

7

CANADIAN HOUSING HEALTH CHECK | MAY 2016

GREATER TORONTO AREA Affordability 

RBC affordability measure - aggregate Ownership costs as % of household income, Toronto

80 Long-term average

70



60



50 40 30



20 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Affordability in the GTA has been on a deteriorating trend since 2012 with the pace of deterioration accelerating in the past year. RBC’s measure is now in a zone that historically has been associated with high risks. Most of the affordability pressure is centered on the single-family home side of the market. Condo affordability, on the other hand, is much less strained, as the level remains reasonably close to its long-term average. Stretched affordability does not appear to be a primary consideration for GTA homebuyers at this stage. Home resales reached record levels in 2015 and activity remained brisk so far in 2016. A lack of ‘quality’ listings may even be a restraining factor in certain neighbourhoods. The Toronto-area market would be more sensitive to a substantial rise in interest rates than most markets in Canada due to its high prices.

Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage

Existing home market balance 

Sales-to-new listings ratio Monthly, S.A., S.A. Toronto 1.0 Seller's market

0.9 0.8 0.7



0.6 0.5

Balanced market

0.4



0.3 Buyer's market

0.2 0.1

0.0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015



Demand-supply conditions are very tight in the GTA. This is a sellers’ market. The sales-to-new listings ratio reached a six-year high of 0.71 in February 2016, well above the 0.60 threshold marking conditions favouring sellers. Indeed, the rate of home price increases is quite strong in the area, particularly for detached homes (approximately 13% y/y), running well ahead of household income growth. Homes available for sale have not kept up with very strong homebuyer demand in the area. In fact, the trend in new listings has been flat to slightly declining. At this stage, the sales-to-new listings ratio suggests little in the way of any imminent price declines in the region. On the contrary, current conditions point toward further acceleration in price gains in the coming months, thereby further exacerbating the GTA’s affordability challenges.

Source: RBC Economics Research, Canadian Real Estate Association

Months of inventory



Monthly, S.A., Ontario 10 Long-term average

9



8 7 6 5

Demand-supply tightness is corroborated by very low inventory of homes for sales (total listings). Although data is available only at the provincial level, the number of months’ inventory in Ontario is at its lowest point (2.8 months in February 2016)since records have been published by the Canadian Real Estate Association (2003).

4 3 2 1 0 2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: RBC Economics Research, Canadian Real Estate Association

Rental vacancy rate



%, purpose-built apartment buildings of three units or more, Toronto 6 Long-term average



5 4



3



2 1 0 1989

1991

1993

1995

1997

Source: RBC Economics Research, CMHC

8

1999

2001

2003

2005

2007

2009

2011

2013

2015

Concerns that Toronto’s condo boom would flood the rental market and cause vacancies to rise have not materialized to date. The rental vacancy rate in the GTA has remained stable and low in recent years. It was 1.6%in October 2015 (the most recent read from CMHC). According to the Toronto Real Estate Board, condo rental activity has surged in recent years. Yet strong supply has been met with equally strong rental demand. So far, there is little evidence that condo investors who rent their units have overestimated rental demand.

CANADIAN HOUSING HEALTH CHECK | MAY 2016

GREATER TORONTO AREA Demand fundamentals Unemployment rate relative to trailing 12-month average



Percentage points, Toronto 4 3



2



1

Labour market conditions in the GTA continue to be generally supportive for the area’s housing market, although there has been a slight deterioration in the past half-year. Toronto’s unemployment rate (7.5% in April 2016) inched higher since last summer. The recent (modest) upward trend has slightly increased the risks posed by the labour market but not sufficient to pose a threat.

-1 -2 1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: RBC Economics Research, Statistics Canada

Adult population growth



Y/Y % change in the 15+ population, Toronto 4.0 Long-term average 3.5



3.0



2.5 2.0 1.5



1.0

Demographic fundamentals have long supported the GTA’s housing market. In the past couple of years we saw a modest weakening in those fundamentals with the rate of population growth slowing. However this slowing began to reverse since the second half of 2015. The rate of growth of in the adult population rose from 1.6% mid-year to 1.7% most recently. This rate remains slightly below the GTA’s longterm average of 1.9% but not worryingly so. The rate falling below 1.5% would be a source of concern.

0.5 0.0 1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Source: RBC Economics Research, Statistics Canada

Supply fundamentals Completed and unsold units - singles and semis



Units per 1,000 population, Toronto, n.s.a. 0.40 0.35

Long-term average



0.30 0.25



0.20 0.15



0.10

GTA home builders are responding to the dearth of single-family homes in the area, with starts rising 48% y/y so far in 2016 (from historically low levels in 2015). This is as a positive development that will likely ease some of the tightness in this housing category. Inventories of newly completed and unsold the single-family continue to be historically low despite trending slightly higher in the past four years. There is no indication of overbuilding of single-family homes in the area at present.

0.05 0.00 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

Completed and unsold units - multiples



Units per 1,000 population, Toronto, n.s.a. 1.2 Long-term average

1.0



0.8 0.6 0.4 0.2



Absorption of newly built condos was brisk in the GTA in recent months and stocks of unsold units have come down. The unabsorbed inventory fell from a 22-year high of 0.58 units per 1,000 population in May 2015 to 0.28 units in April 2016, thereby within a range of values signaling the presence of modest excess supply (between 0.27 and 0.42). A surge in condo completions (reflecting several large condo projects reportedly reaching the ‘completed’ stage) led to a sharp increase in the number of unsold units in early 2015. Completions returned to more normal levels subsequently.

0.0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

9

CANADIAN HOUSING HEALTH CHECK | MAY 2016

GREATER TORONTO AREA Supply fundamentals 

Housing under construction - singles Units per 1,000 population, Toronto, n.s.a. 5.0 Long-term average

4.5 4.0



3.5 3.0



2.5 2.0 1.5

The level of single-detached starts picked up in recent months and boosted the number of such units currently under construction; however, this level remains below the long-term average for the area when measured in per 1,000 population terms. Recent levels of construction therefore do not signal any impending wave of single-unit supply that would cause trouble for the market. Policy to reduce urban sprawl and favour higher density urban development contributed to a significant slowdown in single-detached home construction since the mid-2000s.

1.0 0.5 0.0 1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

Housing under construction - multiples



Units per 1,000 population, Toronto, n.s.a. 14.0 12.0



10.0 8.0



6.0 4.0



2.0 Long-term average

0.0 1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

10

2011

2013

2015

The number of multi-unit dwellings under construction partly rebounded since mid-2015 although it is still down noticeably from the all-time highs reached in 2014. The recent rise was attributed to a sharp increase in multi-unit starts in 2015 following two years of decline. Expressed on a per 1000 population basis, multi-unit construction remains in a high risk zone; however, such risk moderated significantly since 2014. High levels of construction entails the risk that many units may reach the completed stage at once, thereby flooding the condo resale and/or rental markets. So far, both of these markets have been able to absorb the increased supply, although the rate of condo rent increases has slowed down recently.

CANADIAN HOUSING HEALTH CHECK | MAY 2016

GREATER MONTREAL AREA Affordability

Six-month trend

RBC affordability measure - aggregate

Deteriorating slightly Lo w

High

Existing home market balance Sales-to-new listings ratio

Tightening High

Lo w

Months of inventory -

Quebec

Declining slightly High

Lo w

Y ellow

Rental vacancy rate

Rising High

Lo w

Demand fundamentals Change in real 5-Year bond yields

Fairly stable Lo w

Change in the unemployment rate

High

Y ellow

Declining Lo w

High

Y ellow

Population growth

Rising slightly Lo w

High

Supply fundamentals Completed and unsold units per capita - singles and semis

Y ellow

Stable High

Lo w

Completed and unsold units per capita - multiples

Y ellow

Declining Lo w

High

Lo w

High

H ousing under construction per capita - singles

Declining

Y ellow

H ousing under construction per capita - multiples

Rising Lo w

High

11

CANADIAN HOUSING HEALTH CHECK | MAY 2016

GREATER MONTREAL AREA Affordability RBC affordability measure - aggregate Ownership costs as % of household income, Montreal



60 Long-term average

55



50 45



40 35 30



25

The general trend in affordability in the Montreal area continued to improve recently due in part to subdued price gains. RBC’s aggregate measure stood at 43.3% in Q4/15, little changed from a year earlier but still pointing to modestly higher than usual stress for home buyers. Any such stress, however, is mostly a factor for single-detached segments where RBC’s measure exceeds its long-run average. Condo affordability remains close to historical norms. Affordability-related risks thus appear to be limited in the Montreal area at the present.

20 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage

Existing home market balance 

Sales-to-new listings ratio Monthly, S.A., S.A. Montreal 1.4 1.2



Seller's market

1.0 0.8



0.6 Balanced market

0.4 0.2



Buyer's market

0.0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Demand-supply conditions remain balanced in the Montreal area and the recent trend has been toward a modest firming. The sales-to-new listings ratio drifted higher to 0.52 in April, marking the highest level in more than three years. Home resales rose by 6.0% last year, marking first increase in five years. Meanwhile, new listings were largely flat, despite a hefty supply of condos for sale following strong completions of new units in 2014. The gradual firming of overall demand-supply conditions has led to modestly stronger price increases since summer (1.5% y/y so far in 2016) after remaining quite stagnant from mid-2014 until the spring of 2015. The upward trend in the sales-to-new listings ratio suggests that the rate of price increases may strengthen further in the period ahead, and do not point to any imminent risk of a downward price spiral.

Source: RBC Economics Research, Canadian Real Estate Association

Months of inventory



Monthly, S.A., Quebec 18 Long-term average

16



14

Existing home supply expressed as number of months’ inventory shows a slightly declining trend since early 2015. This confirms the modest firming in marked conditions.

12 10 8 6 4 2 0 2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: RBC Economics Research, Canadian Real Estate Association

Rental vacancy rate %, purpose-built apartment buildings of three units or more, Montreal



8 long-term average 7



6 5 4 3

2 1 0 1989

1991

1993

1995

1997

1999

Source: RBC Economics Research, Statistics Canada

12

2001

2003

2005

2007

2009

2011

2013

2015

The wave of condo completions in 2014 increased competition for purpose-built apartment buildings, which over time has translated into higher rental vacancy rates. The vacancy rate in the Montreal area rose from 3.4% in October 2014 to 4.0% in October 2015, thereby signalling some mild degree of oversupply in the rental market.

CANADIAN HOUSING HEALTH CHECK | MAY 2016

GREATER MONTREAL AREA Demand fundamentals Unemployment rate relative to trailing 12-month average



Percentage points, Montreal 4 3



2

Montreal’s job market has shown slightly improving trends since the middle of 2015 with modest employment gains and declining unemployment. Such trends offer mild support for the housing market.

1

-1 -2 1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: RBC Economics Research, Statistics Canada

Adult population growth



Y/Y % change in the 15+ population, Montreal 2.0 Long-term average 1.6



Population growth picked up since the end of last summer, following a two year-long period of easing. By early 2016, the growth rate had recovered to its long-term average, thereby posing little risk for the market.

1.2

0.8

0.4

0.0 1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Source: RBC Economics Research, Statistics Canada

Supply fundamentals Completed and unsold units - singles and semis Units per 1,000 population, Montreal, n.s.a.



0.9 0.8

Long-term average



0.7

There continues to be very few newly completed single-family homes that are unsold in the Montreal area. We see no evidence of an overbuild in this market segment.

0.6 0.5 0.4 0.3 0.2

0.1 0.0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

Completed and unsold units - multiples Units per 1,000 population, Montreal, n.s.a.



2.4 Long-term average

2.0 1.6 1.2

 

0.8 0.4 0.0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015



On the multi-unit dwelling side, conditions improved noticeably in recent months with the stock of unabsorbed units declining markedly since last summer. The stock fell from 0.91 units per 1,000 population in August 2015 to 0.73 units by April 2016. Nonetheless, despite this improvement, the stock remains historically elevated. It is still above the long-term average of 0.69 units in the area. This suggests that some degree of surplus persists in the condo market in Montreal. The risk that this surplus poses for the market is heightened by the fact that there continues to be a historically-high number of multi-dwelling units under construction at present (see below).

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

13

CANADIAN HOUSING HEALTH CHECK | MAY 2016

GREATER MONTREAL AREA Supply fundamentals Housing under construction - singles



Units per 1,000 population, Montreal, n.s.a. 2.0 Long-term average

1.8



1.6 1.4

The risk of any overbuilding of single-family homes in the short term is extremely remote. Current levels of units under construction are significantly below longrun averages, well within the ‘safe zone’ and still trending lower.

1.2 1.0 0.8 0.6 0.4 0.2 0.0 1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

Housing under construction - multiples



Units per 1,000 population, Montreal, n.s.a. 7.0 6.0

5.0



4.0 3.0



2.0

1.0 Long-term average

0.0 1998

2000

2002

2004

2006

2008

2010

2012

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

14

2014

2016

Despite continued signs of surplus in the condo market, builders boosted starts on new multi-unit dwellings in 2015. This resulted in the number of such units currently under construction rising to decades-high levels in recent months. At 5.8 units per 1,000 population in April 2016, that number was well into the high risk zone. The main concern is that the already well supplied condo market may struggle to absorb future increases of completed units. Strong condo construction activity in the past decade partly reflects a structural shift toward multiples supported by urban development policy and affordability advantage relative to single-family homes.

CANADIAN HOUSING HEALTH CHECK | MAY 2016

GREATER VANCOUVER AREA Affordability

Six-month trend

RBC affordability measure - aggregate

Deteriorating sharply Lo w

High

Existing home market balance Sales-to-new listings ratio

Tightening rapidly High

Lo w

Lo w

High

Months of inventory - BC

Declining sharply

Y ellow

Rental vacancy rate

Declining High

Lo w

Demand fundamentals Change in real 5-Year bond yields

Fairly stable Lo w

Change in the unemployment rate

High

Y ellow

Rising slightly Lo w

High

Y ellow

Population growth

Rising Lo w

High

Supply fundamentals Completed and unsold units per capita - singles and semis

Y ellow

Declining Lo w

High

Lo w

High

Completed and unsold units per

Declining

capita - multiples

H ousing under construction per capita - singles

Rising slightly Lo w

High

Lo w

High

Housing under construction per capita - multiples

Rising

15

CANADIAN HOUSING HEALTH CHECK | MAY 2016

GREATER VANCOUVER AREA Affordability RBC affordability measure - aggregate Ownership costs as % of household income, Vancouver



100 Long-term average

90



80



70 60 50 40



30 20 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Housing affordability eroded from already poor levels in the Vancouver area in 2015 and is likely to continue to do so in the near term. Affordability stress is found in both single-family and condo apartment categories; however, it is far more intense in the former. At 81.1% in Q4 2015, RBC’s aggregate affordability measure for the area was close to its worst levels on record. This constitutes a vulnerable position should an unexpected shock (e.g. rapid rise in interest rates) occur. Nonetheless, poor affordability does not appear to hamper homebuyer demand in the area. In 2015, home resales increased 28% to an all-time high of 43,100 units. Activity remained red-hot so far in 2016.

Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage

Existing home market balance Sales-to-new listings ratio



Monthly, S.A., S.A. Vancouver 1.2 Seller's market



1.0 0.8



0.6 Balanced market



0.4 0.2

Buyer's market



0.0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Demand-supply conditions in the Vancouver area are unequivocally favourable to sellers. The sales-to-new listings ratio stood at 0.83 in April 2016, which is up from 0.73 a year earlier and the recent low point of 0.35 recorded in September 2012. The currently tight market conditions suggests that home prices are likely to keep increasing at an accelerating clip in the near term. The risk of any imminent sharp price decline is therefore very low at present. Over the medium term, however, further increases in home prices would exacerbate affordability pressures, which raises material downside risks for the market should a significant negative event occur.

Source: RBC Economics Research, Canadian Real Estate Association

Months of inventory



Monthly, S.A., British Columbia 18 Long-term average

16



14 12

Very tight market conditions are also clearly visible at the provincial level in the historically low inventory of homes available for sale measured in number of months of sale. This indicator corroborates the prevailing strong upward price pressure and likelihood that property values will continue to rise in the near term.

10 8 6 4 2 0 2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: RBC Economics Research, Canadian Real Estate Association

Rental vacancy rate



%, purpose-built apartment buildings of three units or more, Vancouver 6 Long-term average



5 4



3 2

1 0 1989

1991

1993

1995

1997

Source: RBC Economics Research, CMHC

16

1999

2001

2003

2005

2007

2009

2011

2013

2015

Signs of demand-supply tightness are not limited to the home resale market and extend to Vancouver’s rental market. The area’s rental vacancy rate continued to decline in 2015, reaching a seven-year low of 0.8% in October. This is one of the lowest vacancy rates in Canada. Vancouver’s rental market, therefore, shows no evidence of any looming surplus that would cause concerns for the existing home market.

CANADIAN HOUSING HEALTH CHECK | MAY 2016

GREATER VANCOUVER AREA Demand fundamentals Unemployment rate relative to trailing 12-month average



Percentage points, Vancouver 4 3



2 1

The job situation in Vancouver has been generally positive in the past year with employment rising at a respectable clip of 1.5% in 2015 (with the pace accelerating rapidly to 6.0% y/y in recent months) and the unemployment rate remaining quite stable in the range of 5.7% to 6.1%. Labour market developments do not pose any immediate threat to the housing market. On the contrary, they offer support currently.

-1 -2 1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: RBC Economics Research, Statistics Canada

Adult population growth



Y/Y % change in the 15+ population, Vancouver 4.0 Long-term average

3.5



3.0 2.5

Population growth (1.8% y/y in April 2016) picked up slightly since summer last year, although it remained modestly weaker than the long-term average for the area. At this stage, demographic factors represent a fairly neutral risk for the market.

2.0 1.5

1.0 0.5 0.0 1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Source: RBC Economics Research, Statistics Canada

Supply fundamentals Completed and unsold units - singles and semis



Units per 1,000 population, Vancouver, n.s.a. 1.6 1.4

Long-term average

1.2



1.0 0.8 0.6

Absorption of single-detached and semi-detached has been quite vigorous since early 2014. As a result, the number of recently completed and unsold units has fallen steadily, reaching 0.31 units per 1,000 population by April 2016— well into the ‘safe zone’. With singles and semi-detached completions rising only modestly in in 2015 (up 2.3%), the Vancouver-area market does not show any signs of being overbuilt at this point. On the contrary, very tight market conditions for existing homes suggest that supply is short.

0.4 0.2 0.0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

Completed and unsold units - multiples



Units per 1,000 population, Vancouver, n.s.a. 3.0 Long-term average

2.5 2.0 1.5

1.0

  

Similarly, the situation on the multi-unit dwelling side of the market remains safe. The number of completed and unsold units has trended lower since early 2014, reaching a seven-year low in the spring of 2016. Back to back declines in apartment completions in 2014 and 2015 limited the flow of new supply into the market. The Vancouver condo market does not appear to be overbuilt at this point.

0.5 0.0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

17

CANADIAN HOUSING HEALTH CHECK | MAY 2016

GREATER VANCOUVER AREA Supply fundamentals Housing under construction - singles



Units per 1,000 population, Vancouver, n.s.a. 4.0 Long-term average

3.5



3.0 2.5

Builders’ response to the shortage of single-family homes in the Vancouver area has been quite orderly to date. While the number of single-family homes under construction has picked up since early-2014, it remains at levels that poses minimal risk of flooding the market.

2.0 1.5 1.0 0.5 0.0 1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

Housing under construction - multiples



Units per 1,000 population, Vancouver, n.s.a. 14.0 12.0



10.0 8.0 6.0 4.0

2.0 Long-term average

0.0 1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

18

2011

2013

2015

The number of multi-family units under construction (on a per 1000 population basis) rose to a historically elevated range in 2015 signaling greater-than-usual risks to the future balance of the market. Developments last year were a continuation of a trend that started in 2011 and reflected the fact that more multi-unit dwellings have been started than completed in each of the last five years, thereby boosting the number of units under construction.

CANADIAN HOUSING HEALTH CHECK | MAY 2016

CALGARY AREA Affordability

Six-month trend

RBC affordability measure - aggregate

Stable Lo w

High

Existing home market balance Sales-to-new listings ratio

Loosening sharply High

Lo w

Lo w

High

Months of inventory -

Alberta

Rising rapidly

Y ellow

Rental vacancy rate

Rising rapidly High

Lo w

Demand fundamentals Change in real 5-Year bond yields

Fairly stable Lo w

Change in the unemployment rate

High

Y ellow

Rising rapidly Lo w

High

Y ellow

Population growth

Slowing Lo w

High

Supply fundamentals Completed and unsold units per capita - singles and semis

Y ellow

Rising slightly Lo w

High

Lo w

High

Lo w

High

Completed and unsold units per capita - multiples

Rising rapidly

Housing under construction per capita - singles

Declining

Y ellow

H ousing under construction per capita - multiples

Declining Lo w

High

19

CANADIAN HOUSING HEALTH CHECK | MAY 2016

CALGARY AREA Affordability RBC affordability measure - aggregate Ownership costs as % of household income, Calgary



90 Long-term average

80



70

60 50



40

Housing affordability is a generally constructive factor for the Calgaryarea market, remaining quite stable in 2015 (in the range of 34%-35% for RBC’s aggregate measure). In the current difficult context—with historically low oil prices and surging unemployment sapping the confidence of both buyers and sellers— the good affordability standing reduces the risk of a significant price decline. Calgary faces many tough issues; however, there is no evidence to suggest that affordability is one of them.

30 20 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Brookfield RPS, Statistics Canada, Bank of Canada, Royal LePage

Existing home market balance Sales-to-new listings ratio



Monthly, S.A., S.A. Calgary 1.2 1.0 Seller's market



Balanced market



0.8

0.6 0.4

Buyer's market

0.2

Demand-supply conditions have weakened considerably since mid-2015. The sales-to-new listings ratio eased to an average of 0.49 so far in 2016 from 0.70 as recently as June 2015. The sales-to-new listings ratio managed to stay in ‘balanced territory’ and therefore within a ‘safe zone’; however, this is largely because new listings have been curtailed significantly—new listings fell 11% in 2015 and are flat year-to-date in 2016. Housing demand clearly is soft in Calgary. Home resales plummeted by 29% in 2015 and weakness has carried over into early-2016 (resales were down 10% y/y in the first four months of the year).

0.0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Canadian Real Estate Association

Months of inventory



Monthly, S.A., Alberta 12 Long-term average

10



8 6



4

The picture for the overall inventory of homes for sale in Alberta tells a more concerning story. The number of months’ inventory rose sharply since August 2015 to an average of 6.6 so far in 2016, a level that suggests that plentiful supply is available to buyers. We believe this to be the case in Calgary, where home prices have been declining at an accelerating pace since the fall of 2015. Downside risks to home prices should be expected to continue to mount in the near term.

2

0 2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: RBC Economics Research, Canadian Real Estate Association

Rental vacancy rate



%, purpose-built apartment buildings of three units or more, Calgary 8 Long-term average 7



6



5 4 3

2 1 0 1989

1991

1993

1995

1997

1999

Source: RBC Economics Research, Statistics Canada

20

2001

2003

2005

2007

2009

2011

2013

2015

Similarly, Calgary’s rental market shows signs of increasingly being over -supplied. The rental vacancy rate surged to a six-year high of 5.3% in October 2015. It was 1.4% a year earlier. Such high vacancy rate raises significant downside risks for rent values in the area and revenue prospects for condo investors.

CANADIAN HOUSING HEALTH CHECK | MAY 2016

CALGARY AREA Demand fundamentals Unemployment rate relative to trailing 12-month average



Percentage points, Calgary 4 3



2



1

Unemployment currently is surging in Calgary. The jobless rate set a 21year high of 8.6% in March 2016, up from 5.0% a year earlier, although it has eased slightly to 8.3% in April. The speed with which labour market conditions are deteriorating poses significant risks for the housing market. The unemployment rate recently jumped as much as 1.7 percentage points above its trailing 12-month average, thereby representing a severe shock surpassed in its swiftness only by the surges recorded during the recessions of 2008-09 and early 1990s.

-1 -2 1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: RBC Economics Research, Statistics Canada

Adult population growth Y/Y % change in the 15+ population, Calgary



5.0 Long-term average 4.0



3.0



2.0

Deteriorating job prospects contributed significantly to a slowdown in Calgary’s population growth—to 2.4% in April 2016 from a recent high of 4.0% in early 2014. While the current pace remains quite robust by most cities’ standards, it is weaker than Calgary’s long-run average of 2.9%. Any further moderation would threaten to erode Calgary’s traditionally strong demographic fundamentals for housing.

1.0

0.0 1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Source: RBC Economics Research, Statistics Canada

Supply fundamentals Completed and unsold units - singles and semis Units per 1,000 population, Calgary, n.s.a. 1.6 Long-term average

1.4

 

1.2



1.0 0.8 0.6



0.4

There are few signs of overbuilding of single-detached homes in Calgary. The number of unsold single-detached and semi-detached has trended lower in the past three years and stabilized at historically low levels in 2015 (on a per 1000 population basis). Despite the turbulence in the resale market, stability of the unsold inventory is being achieved by drastic curtailment of new single-family home construction. Single-family home starts plummeted by 36% last year and were down 43% y/y in the first four months of 2016. Such builder restraint substantially minimizes overbuilding risks.

0.2 0.0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

Completed and unsold units - multiples Units per 1,000 population, Calgary, n.s.a. 0.8



Long-term average

0.7 0.6



0.5 0.4 0.3 0.2



The number of unabsorbed multi-unit dwellings rose substantially in the past year, albeit from extremely low levels a year ago (when Calgary arguably had a supply shortage). The stock of unsold units was driven higher by a sharp 25% increase in condo apartment completions at a time when demand turned cold. The completed and unsold inventory recently surpassed the long-term average (on a per 1000 population basis) for the area, thereby representing a sign of growing market surplus and posing increasing risks for the stability of the market.

0.1 0.0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

21

CANADIAN HOUSING HEALTH CHECK | MAY 2016

CALGARY AREA Supply fundamentals Housing under construction - singles



Units per 1,000 population, Calgary, n.s.a. 8 Long-term average

7



6 5

The dramatic scaling back of single-detached home starts contributed to a steady decline in the number of units under construction in the past year to historically low levels in recent months. Such subdued levels of construction pose minimal risks of destabilizing the market.

4 3

2 1

0 1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

Housing under construction - multiples



Units per 1,000 population, Calgary, n.s.a. 14 12 10



8



6 4

There has been some moderation on the multi-unit side as well in recent months; however, the level of construction remains historically elevated due to a wave in condo starts in 2014 that continues to proceed through the construction ‘pipeline’. Current levels pose significant risks for the market especially in light of rapidly weakening demand. A sharp 14% drop in condo starts in 2015 suggests that the situation is unlikely to worsen in the near term.

2 Long-term average

0 1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: RBC Economics Research, Statistics Canada, Canada Mortgage and Housing Corporation

The material contained in this report is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, without express authorization of the copyright holder in writing. The statements and statistics contained herein have been prepared by RBC Economics Research based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This publication is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

22

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