Economic Analysis of Ontario

Transcription

1 Volume 8 Issue 3 August 2017 ISSN: Ontario Housing Outlook Highlights Policy-driven declines in home sales and prices to bottom in H2 2017, recovery trend modest Greater Golden Horseshoe leads housing slowdown as other regions steady Annual home sales and median prices to decline through 2018, but trend positive Current housing correction is temporary and confidence driven, market to rebound with strength in economy Housing starts dip in 2018 before rebounding in 2019 Summary Ontario s housing market is in a state of significant flux, despite strong economic fundamentals, as provincial and federal measures to cool the market have eroded consumer confidence and investment, leading to sharp sales declines and lower prices. This abrupt market shift will prove temporary, but a rebound in sales and prices will be gradual and hold below early-year levels. Annual provincial housing sales are forecast to decline eight per cent this year after tracking a double-digit growth trend early in the year, while an easing price trend will hold growth in annual median values at 7.7 per cent. The slower pace of activity will carry over into 2018, leading to slightly fewer annual sales and lower prices, before moving higher into The new home market is expected to take its cue from the existing home market, as policy measures focused on foreign purchasing, and rent control, will curtail some investment demand in the market. Housing starts will reach 73,500 units in 2017, before dipping to 68,200 units next year, and rebounding thereafter to 74,600 units. Units (000s) Ontario Housing Market Forecast Transactions (L) Median Price (R) Source: Teranet, Central 1 Credit Union, Forecast Policy Driven Downturn Provincial housing policy shocks market Dollars (000s) 500 Index Sales, Policy Announcement Month = Lower Mainland, B.C. 20 Toronto and Hamilton-Burlington Months from announcement Source: CREA, Central 1 Credit Union Latest: June April s introduction of Ontario s Fair Housing Plan quickly shook market momentum, at least temporarily, triggering a steep decline in sales as prospective homebuyers and investors took a step back and recalibrated expectations. Provincial MLS sales declined more than 25 per cent from April through June, primarily in the Greater Golden Horseshoe (GGH) region, with lesser declines in other parts of the province. Greater Toronto area sales have declined by 40 per cent. Meanwhile, new listings have surged, suggesting a head for the exits by some speculators and investors, in light of a non-resident tax on purchases and expansion of rent control policies. Pricing momentum typically moves quickly with 0 1

2 sales and market sentiment and prices have moved lower in the most affected regions, a trend which will continue over the next few months. The impact of policy changes on the market continues to unfold, but we anticipate current sales and price weakness will last three-to-six months before activity stabilizes and grinds higher. Last year s Metro Vancouver foreign-buyer tax provides a valid comparison for how the market could unfold. Sales and prices in Metro Vancouver have recovered to pre-tax levels after an initial three-to-six month softening. While that rebound was aided by a provincial down payment purchase plan, and detached home sales are still being impacted, the impact of the tax has been temporary with a strong regional economy and low interest rates contributing to a return to strength. The Toronto and broader GGH market will evolve in a similar fashion, but the rebound will likely be more shallow and prolonged. While the economy is solid, and anecdotal information suggests a smaller footprint of foreign buyers in the region compared to Vancouver, Ontario s 16-point plan is broader with measures tackling rent control, assignment sales, and potential tax reforms. Other factors in play include rising interest rates and prospects of further federal regulatory tightening. Changes to rent control policy could be more influential over a longer time frame, which could have the unintended consequence of cutting rental starts. Resale market conditions strong, but curtailed by policy measures Current weakness in the housing market followed a robust start to the year that was driven by the strong domestic fundamentals of a growing economy, population growth, demographic changes, and desirability of homeownership. A low Canadian dollar likely buoyed some international purchases, but more speculative forces have been curtailed more recently by the foreign buyer tax and tougher CRA rules enforcement The downshift in activity has been concentrated in the Greater Golden Horseshoe Area (GGH), which includes Greater Toronto, Hamilton- Ontario MLS Residential Transactions Units 14,000 12,000 10,000 8,000 6,000 4,000 Toronto and Hamilton-Burlington 2,000 Rest of Ontario Source: CREA, Central 1 Credit Union Latest: June 2017 $(000s) 1, Greater Toronto MLS Home Price 200 MLS Average CREA Housing Price Index Source: CREA, Central 1 Credit Union Latest: June 2017 Niagara, and other feeder regions, reflecting relatively higher foreign purchases, and investors. A slump in Toronto has feedback effects on neighbouring markets through commuter and recreational demand. Other regions, such as Ottawa, have continued to experience rising sales, or range-bound activity, as in northern Ontario or Kitchener-Waterloo. Moderate economic conditions continue to dominate housing trends in these areas. Market conditions in most areas of the province have cooled over the past few months, but generally remain in balanced territory following the policy shift, but again the shift has been most pronounced in the GGH. Similarly, rapid price growth observed in early-2017 has cooled in the affected regions as listings have surged with fewer sales. Average prices in the GGH peaked in May and declined 15 per cent in Greater Toronto and more than 10 per cent in Hamilton in June. Year-over-year growth has shifted from a 20 per cent pace to a five to 10 per cent range in short order. However, much of this reflects a change in the 2

3 composition of sales, but levels have eroded with the MLS housing price index for Toronto down 1.3 per cent. Further declines are likely in the broader GGH given emergence of buyers market conditions. Mixed pricing conditions have occurred in other markets, but trends have been comparatively stable. Housing market outlook This report forecasts sales and prices based on title transfers, inclusive of new home sales, a broader measure of housing activity than MLS activity alone. After a strong performance in 2016, housing transactions will decline eight per cent to 296,800 units this year. While still elevated, this is the lowest since A slow recovery cycle will cut full-year 2018 sales by another two per cent, followed by a seven per cent increase in Weaker price momentum in the second half of this year and a shift in sales composition away from the GGH will limit annual growth in the provincial median price to 7.7 per cent to $410,000 this year, with a drop of 1.2 per cent to $405,000 in 2018, before a six per cent increase to $430,000 in Lower provincial sales this year and next will be primarily driven by the Greater Horseshoe region, with Toronto-area sales declining 19 per cent this year and nine per cent in 2018, with softer activity also observed in the Hamilton-Niagara area. However, the 2018 decline will reflect a weak start to the year with sales forecast to trend higher through the year as confidence rebounds, and activity realigns with economic growth. Sales and pricing activity will remain firm among other regions of the province, led by areas including the census metropolitan areas of Kingston, London and Windsor, with stability in Ottawa. Similarly, price growth is forecast to remain positive across most regions outside Toronto and Hamilton in 2018 and This current downcycle is not a major market crash or housing recession, but rather a policyinduced correction in conjunction with deterioration in buyer affordability, following strong price gains in 2016 and early Ontario s negative housing cycle will turn near the end of the third quarter as sales will begin to ascend in the GGH. However, this uptrend will be shallow with rising momentum as 2018 Sales-to-New Listings by Economic Region Northwest Northeast Stratford-Bruce Windsor-Sarnia London Ham-Niagara Kit-Wat Barrie Toronto Muskoka-Kawarthas Kingston-Pembroke Ottawa Source: CREA, Central 1 Credit Union 3-month moving average, s.a. progresses. Home values will firm as the recent surge in new listings in the GGH pulls back, reflecting a lack of urgency on the part of owners to sell in response to weaker markets, given the solid economic backdrop. Economic outlook remains solid June '17 Mar Regional Housing Transaction Growth Forecast Economic Region Ontario Northwest Northeast Stratford-Bruce Windsor-Sarnia London Ham-Niagara Kit-Wat Barrie Toronto Muskoka-Kawarthas Kingston-Pembroke Ottawa Source: Teranet, Central 1 Credit Union Forecast Economic trends remain supportive of housing demand. Real GDP growth is forecast to expand at a moderately strong pace of 2.7 per cent in 2017 and above two per cent in 2018 and Consumer demand led by employment and population growth will remain a key driver with further gains in government capital investment and further momentum from the business investment and trade front. Employment growth will be modest near one per cent over the forecast period, lowering the unemployment rate to 6.3 per cent and contributing to wage momentum. That said, feedback of the housing market correction on the economy will be a drag. Population growth will continue to buoy the housing sector with positive net interprovincial 3

4 migration and rising international gains. Challenges in Alberta have contributed to gains in the former as Ontario has attracted more residents from other provinces due to the relative strength in its economy. This trend will decelerate as provincial economic growth converges, but remain positive through the forecast period. Strong international migration, with the addition of 25,000 Syrian migrants to Ontario in 2016, will continue to be a steady supply of population growth for the province. Demographic trends are also favourable with the millennial age cohort, this large group has entered the homeownership stage of their lives in recent years and given mature housing markets populated by their parents, is one key source of the demand that has underpinned market strength. On the other side of the coin, areas like Muskoka and Kawarthas and Kingston-Pembroke area have become more popular destinations for the growing seniors segment, in particular the cities of Peterborough and Kingston. In contrast, tighter credit conditions will temper some momentum. Posted five-year rates are forecast to rise about percentage points through the forecast period, aligned with higher bond yields. Meanwhile, the cost of funds for lenders have increased due to recent changes to regulatory changes to portfolio insurance. Further regulatory measures are a risk to the market, including proposed stress-tests on uninsured mortgages proposed by the Office of Superintendent of Financial Institutions, which would cut purchasing power for low-ratio buyers In the absence of a job-loss inducing economic recession, this corrective phase will be temporary and reversion to higher sales and prices will occur. Affordability will continue to erode as population growth and land availability lift home values, and interest rates climb modestly. This will cause some buyers to downgrade their expectations, tap their housing-equity rich parents, or fall out of the market altogether. New home construction Aligning with the broader market, Ontario housing starts have eased following a strong start to the year in part due to recent policy changes, which has generated some uncertainty for both prospective homebuyers and builders. Rent Regional Median Price Growth Forecast Economic Region Ontario Northwest Northeast Stratford-Bruce Windsor-Sarnia London Ham-Niagara Kit-Wat Barrie Toronto Muskoka-Kawarthas Kingston-Pembroke Ottawa Source: Teranet, Central 1 Credit Union Forecast Ontario Housing Starts Units (000s) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Source: CMHC, Central 1 Credit Union, Forecast control expansion will likely dampen individual investor demand for apartment condos and purpose-built rental units. Following a 6.8 per cent increase in 2016, annual starts are forecast to ease 1.8 per cent this year and seven per cent in 2018 to 68,200 units before rebounding to nine per cent in Despite a temporary pullback, housing starts will remain elevated and revert higher. Economic and population growth, tight rental vacancy rates and higher rents will continue to fuel construction activity. While starts will exceed estimated household formation forecasts for the period, this construction cycle will not lead to an oversupply of housing, given current low inventories and low rental-vacancy rates. Condos are by-and-large pre-sold with the remainder absorbed by the market during construction due to population expansion. More supply is required to meet future demand and builders will ramp up production. Curtailment risks greater future price gains. 4

5 Renovation spending growth will track about three per cent this year and decelerate through the forecast period, in part due to fewer housing sales. Steady housing transactions will continue to drive re-investment in homes, while other factors such as increased price gaps between detached and multi-family homes, and agingin-place trends will lift renovation spending on existing properties. With population growth concentrated in the large metro areas, new home construction and renovation demand will see rising residential building permits in these areas. Bryan Yu Deputy Chief Economist Mobile: Appendix Tables Residential Sales (Units)- Regional Summary Residential Sales (Units) - Select Census Metropolitan Areas Residential Median Sales Price ($) - Regional Summary Residential Median Sales Price ($) - Select Census Metropolitan Areas Residential Investment Residential Building Permits (Units) - Regional Summary Forecast Summary _ Ontario

6 Residential Sales (Units) - Regional Summary Economic Region Ottawa 27,188 27,075 27,375 28,000 27,825 % change Kingston-Pembroke 9,771 10,738 11,238 11,700 11,840 % change Muskoka-Kawarthas 11,461 12,455 12,600 13,000 13,500 % change Toronto ER 143, , , , ,000 % change Kitchener-Waterloo-Barrie 32,205 35,504 35,200 35,500 37,300 % change Hamilton-Niagara 33,581 35,166 35,600 34,800 36,828 % change London 14,361 15,963 16,852 17,350 17,620 % change Windsor-Sarnia 13,427 14,312 15,000 15,400 15,600 % change Stratford-Bruce 6,660 7,432 7,560 7,900 8,100 % change Northeast 11,219 10,705 10,600 10,940 11,065 % change Northwest 4,423 4,051 3,951 3,999 4,041 % change Ontario 308, , , , ,719 % change Sources: Teranet, C1CU. Forecast

7 Residential Sales (Units) - Select Census Metropolitan Areas Windsor 7,619 8,260 8,760 9,000 9,460 % change Oshawa 9,640 10,109 9,100 9,200 10,000 % change Toronto 136, , , , ,000 % change Ottawa (Ont) 20,570 20,289 20,500 20,889 21,300 % change Thunder Bay 2,299 2,163 2,113 2,163 2,213 % change Greater Sudbury 2,694 2,634 2,580 2,700 2,800 % change Peterborough 2,691 3,040 3,050 3,250 3,400 % change London 10,801 11,820 12,720 13,300 13,500 % change Barrie 5,674 6,324 5,700 5,500 5,800 % change Guelph 3,913 3,831 3,700 3,600 4,000 % change Kitchener-Cambridge-Waterloo 10,522 11,958 12,300 12,700 13,500 % change Kingston 3,315 3,377 3,600 3,800 3,800 % change Hamilton 17,367 17,134 17,300 17,000 17,500 % change St.Catharines-Niagara 10,208 11,604 12,000 11,500 12,500 % change Sources: Teranet, C1CU. Forecast

8 Residential Median Sale Price ($) - Regional Summary Economic Region Ottawa 313, , , , ,000 % change Kingston-Pembroke 224, , , , ,000 % change Muskoka-Kawarthas 252, , , , ,000 % change Toronto ER 476, , , , ,000 % change Kitchener-Waterloo-Barrie 318, , , , ,000 % change Hamilton-Niagara 297, , , , ,000 % change London 228, , , , ,000 % change Windsor-Sarnia 168, , , , ,000 % change Stratford-Bruce 229, , , , ,000 % change Northeast 181, , , , ,872 % change Northwest 182, , , , ,214 % change Ontario 348, , , , ,000 % change Sources: Teranet, C1CU. Forecast

9 Residential Median Sale Price ($) - Select Census Metropolitan Areas Windsor 171, , , , % change Oshawa 375, , , , % change Toronto 487, , , , ,000 % change Ottawa (Ont) 334, , , , ,000 % change Thunder Bay 194, , , , ,400 % change Greater Sudbury 231, , , , ,000 % change Peterborough 258, , , , ,000 % change London 235, , , , ,000 % change Barrie 326, , , , ,000 % change Guelph 338, , , , ,000 % change Kitchener-Cambridge-Waterloo 308, , , , ,000 % change Kingston 263, , , , ,000 % change Hamilton 350, , , , ,000 % change St.Catharines-Niagara 229, , , , ,000 % change Sources: Teranet, C1CU. Forecast

10 Residential Investment: Ontario $ Millions Total residential investment 58,574 66,456 69,819 72,286 78,223 % change New dwellings 23,234 27,718 28,407 28,245 32,014 % change Renovations 26,606 28,880 30,984 33,008 34,686 % change Total acquisition costs 8,317 9,407 9,944 10,516 10,977 % change Other residential construction % change $ 2007 Millions Total residential investment 45,318 49,153 49,472 49,057 51,215 % change New dwellings 17,976 20,501 20,128 19,168 20,961 % change Renovations 20,585 21,361 21,955 22,401 22,710 % change Total acquisition costs 6,434 6,958 7,046 7,136 7,187 % change Other residential construction % change Housing starts, units 70,156 74,936 73,565 68,226 74,600 % change

11 Residential Building Permits (Units) - Regional Summary Economic Region Ottawa 5,808 8,679 8,400 8,000 8,200 % change Kingston-Pembroke 2,074 2,245 2,580 2,600 2,750 % change Muskoka-Kawarthas 1,880 2,229 2,300 2,400 2,500 % change Toronto ER 40,153 38,094 37,500 35,900 38,000 % change Kitchener-Waterloo-Barrie 9,290 12,398 10,500 10,800 11,200 % change Hamilton-Niagara 6,589 7,150 7,500 7,000 7,200 % change London 2,773 4,751 5,000 4,700 4,900 % change Windsor-Sarnia 1,994 2,055 2,150 2,100 2,100 % change Stratford-Bruce 1,345 1,550 1,860 1,700 1,650 % change Northeast 1,143 1,029 1,050 1,100 1,050 % change Northwest % change Ontario 73,438 80,503 79,205 76,675 79,900 % change Sources: Statistics Canada, C1CU. Forecast , 2016 estimated. 11

12 Forecast Summary: Ontario Real GDP, % chg Nominal GDP, % chg Employment, % chg Unemployment Rate (%) Population, % chg Housing starts, units (000s) Retail sales, % chg Personal income, % chg Net operating surplus: Corporations, % chg Consumer price index, % chg Source: Statistics Canada, Central 1 CU. Terms Published by the Economics Department of Central 1 Credit Union, 1441 Creekside Drive, Vancouver, B.C. V6J 4S7 Central 1 Credit Union, This work may not be reproduced in whole or part, by photocopy or other means, without permission of Central 1 Credit Union. Economic Analysis of British Columbia (the Analysis ) may have forward-looking statements about the future economic growth of the Province of Ontario and its regions. These statements are subject to risk and uncertainty. Actual results may differ due to a variety of factors, including regulatory or legislative developments, competition, technological change, global capital market activity and general economic conditions in Canada, North America or internationally. This list is not exhaustive of the factors that may affect any of the Analysis forward-looking statements. These and other factors should be considered carefully and readers should not place undue reliance on the Analysis forward-looking statements. The Analysis and Central 1 Credit Union disclaims any and all warranties, whether express or implied, including (without limitation) any implied warranties of merchantability or fitness for a particular purpose. The Analysis and Central 1 Credit Union will not accept any responsibility for the reader s use of the data and / or opinions presented in the Analysis, or any loss arising therefrom. Chief Economist: Helmut Pastrick Chief Deputy Economist, BC: Bryan Yu Senior Financial Economist: David Hobden Production: Judy Wozencroft 12