For the first time in 5 years the two heavyweights of the Canadian housing market have broken above their previous peaks. Both real estate market values are now in uncharted territory, implying a new growth cycle is in its infancy.  The new highs created in February were $1.869M in Greater Vancouver & $1.684M in Toronto. For the home values to remain in growth territory it is likely that prices will stay in close contact with their uptrends which have supported prices to their current lofty levels. 

However in Greater Vancouver the supportive uptrend is close to perpendicular. Such aggressive trends are challenged to hold in place for very long. Implying the recent $267,000 price increase over the 7 months is not a sustainable growth pattern. In the City of Toronto values have risen well above the long term uptrend which instigated during the creation of their market cycle low. In the past 3 months alone home values have shot up a dramatic $208,000 according to the average sales price, which is again a nearly impossible trend to persist for any length of time. 

What spurred on the torrid price increase, in the middle of a pandemic? The instant increased demand for a larger building footprint was very apparent. More importantly but less obvious was the banks ability to issue new mortgages to the increased applicants. This was enabled due to the Mortgage Bond purchasing Program (CMBP) introduced by the Bank of Canada (BoC) beginning in March 2020. The Bond purchasing Program enabled the BoC to purchase up to $500 Million in secondary Mortgage Bonds per week. By July there had been over $6.2 Billion of mortgage bonds bought on the secondary market. 

The Bank of Canada routinely purchases Mortgage Bonds to balance there assets. However they historically have solely bought Mortgage Bonds on the Primary market. The creation of CMBP was so the BoC could purchase on the secondary (resale) market.

Why did the Bank of Canada step in and purchase on the resale market for the first time? Simple answer is, no one else would. That would have left the secondary market dealers with their hand full of existing mortgages on their balance sheets, in turn the banks books would have remained full. That would have led to much tighter mortgage funds available, during the influx in applications. The Bank of Canada jumped to action and “supported normalized markets”. The odd thing is, the amount of funds offered to the mortgage market during the pandemic compared to the governments relief to other sectors. The amount of secondary Canadian Mortgage Bonds purchased was two times larger than the Canadian government COVID 19 support for individual sectors. For comparison sake, $8 Billion to support the mortgage market but the entire Air Transit Sector received $331Million.

The guarantee that the Bank of Canada was going to “support normalized market functions” to the tune of $500M per week, during a abnormal period of time, created a no fear environment for both the secondary mortgage market dealers and the major Canadian banks.. The banks newly found confidence, coupled with historically low interest rates created the environment for recent insane price increases of $267,000 in Vancouver and $247,000 in Toronto over the course of just several months. Even as homes values were increasing $100,000 or even $200,000 over the most recent comparable, mortgages were approved with ease. The Canadian Bond Mortgage purchasing Program came to its conclusion during October 2020 after expending over $8 Billion. 

As the potential free fall of the mortgage bonds was not allowed to take place, an artificial floor was created by the BoC. The creation of the bond market floor encouraged other investors to step to the plate since the entire Bank of Canada would essentially need to collapse in order for the mortgage bond resale market could go any lower. Akin to the 08-09 recession when the US Federal Reserve said that some banks will not fail, as they did with Bank of America, the stock was in free fall until that announcement.  Similarly when the secondary mortgage market was positioning for further losses, the Bank of Canada said real estate will not fail.

It wasn’t as if home values were down immensely already and could not withstand further losses. The Greater Vancouver housing market was around $1.6M (-12% from peak) during January - July 2020. The market cycle low already been established during early 2019 when home values had dropped to $1.486M (-20%) from the 2017 peak value of $1.830M. Without the 8 Billion influx, the market would have found it near impossible to have achieved the current values. 

Similarly in the City of Toronto, the average home is selling for the $1.684M. That is up $247,250 when compared to the initial 6 month average of 2020. As with Greater Vancouver the City of Toronto had already found its market cycle bottom of $1.145M during December 2018, implying a drop of -27% from the peak which had occurred during April 2017 at $1.578M.

The goal of the Bank of Canada with the creation of the CMBP was to offer support in order to normalize market functions across Canada. The goal was not to create frenzied environment, but since Greater Vancouver and Toronto housing market have a tendency to be frenzied with frequency, and both market had been stagnant for over 4 years. By enabling the bidding war environment to return; is, in some weird way, supporting a return to normalized markets in the two major Canadian real estate markets.

Greater Toronto Area Market Update.

The Greater Toronto market has experienced a prolonged uptrend which has propelled prices up 127% since 2010. The aggregate average sales price had initially peaked in 2017 at $920K (125% Growth over 7 years), with June 2020 recording a $930K price. These two data points are seemingly creating a double top for the GTA real estate prices.  

The first break in the armour was the rapid uptrend (green line) established in 2016, which rose prices over $290,000 in a year and a four months. That uptrend broke in 2017. The rapid uptrend was not sustainable growth rate, prices subsequently retreated back to our forecasted higher echelon of the lower threshold $750K during the end of 2017 and into 2018.

Eitel Insights analytics is noticing a double top is forming in the GTA prices. After the creation of the first peak in 2017 with current prices representing the second peak. After peaks comes valleys, the GTA has remained in an impressive uptrend since the market took a temporary pause in 08-09. That uptrend (black line) is about to encounter a serious test which will cause market volatility.

Prices will begin to search for their market cycle lows, just like every other market cycle previous. The chart has identified a few pricing threshold that will be tested in the upcoming months and likely years. Eitel Insights anticipates the market bottom to occur and create a channel which the market will remain likely until 2025.

With a double top forming in the price chart, we next take a look at the supply demand factors. Inventory has seen the bottom during December 2016 with only 4700 active properties. The most recent bottom came during 2019 with over 7400 active listings. Still well below the 15 year average of 17,800 actives, but a higher low none the less. Equally as important, the data is officially breaking the downtrend that had been in play since 2013 signalling that trend has completely come to its end. Going forward we anticipate inventory to continue in an uptrend meaning with higher lows and higher highs in the reported data.

The magical number of 21,000 active listings which hasn’t been broken in the past 7 years, will eventually relent in the upcoming several quarters. Inventory had been getting sold in record time and record money in years previous, this in turn has kept the inventory a nominal levels, while increasing the asking price.

The sales chart demonstrates there has been less demand at current prices, a trend which has been developing seemingly unnoticed by most. Sales are not low in 2020 solely due to Covid-19. No, they have been trending lower since 2016. In fact sales have not remained above 10,000 since 2016. June 2016 had over 10,000 sales and the month ended with 12,000 inventory. Since then inventory levels have surpassed 19,000 each summer with ease, however the sales have not risen above 10,000 since, with one data point being the exception during 2017. That signals to Eitel Insights, increasing demand to sell with decreasing demand to buy.

Demand has waned. Up next anticipate an increase to the supply without nearly the amount of a buyer as years previous. This upcoming reality inevitably creates competition amongst sellers, which in turn, leads to lower asking prices. As with any cycle, the overheated frenzied activity eventually ends, and gives way to a whole new kind of chaos on the other end of the spectrum.

The condo market in particular will see a chaotic atmosphere, as newly completed properties begin to enter the GTA market in 2021 and predominantly in 2022. The flood of inventory that is on the horizon is eerie enough, throw in the investor market that hasn’t received rent since Covid-19 hit and cannot evict the tenant going through the proper channels until who knows when. Once the investors do get their properties back, selling will be on the mind. Unfortunately this example will occur by the hundreds, and the market will flood with new and older inventory.

The historical chart is calling for a similar market cycle to the one that occurred from 1989-2002. After a 4 year uptrend prices shot up 167% to reach the all-time high of $261K in April 1989. After peaking the search began for the market cycle bottom, which occurred multiple times throughout the 11 year price channel.

Eitel Insights is not calling for an 11 year channel, however we are stating that the market cycle began in 2017. 3 years later and the current data is simply confirming the previous high, as time marches on prices will begin to work their way lower and find that market bottom. We are forecasting a 24% correction, indicating prices will test the $700K threshold in the upcoming years. The bottom will likely occur in 2022, once the inventory has flooded the GTA.

Not all markets across Canada are created equal, some areas are closer to the bottom. While others still have significant percentage losses upcoming. Become an Eitel Insights client to find out which are which.