The Market Keeps Growing in Quebec, FORECASTER - CANADA … · New construction kept up a good pace...

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SPOTLIGHT ON HOUSING François Dupuis, Vice-President and Chief Economist Mathieu D’Anjou, Deputy Chief Economist Hélène Bégin, Senior Economist Desjardins, Economic Studies: 418-835-2450 or 1 866-835-8444, ext. 5562450 [email protected] desjardins.com/economics NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2019, Desjardins Group. All rights reserved. Quebec and Ontario: A Tale of Two Dynamics Quebec’s resale market maintained strong growth at the start of the year, while Ontario’s remained stable (graphs 1 and 2). A series of measures applied by the Ontario government in 2017, including the 15% tax on foreign buyers in the Greater Toronto Area, delivered the first blow to the market. Then, stricter mortgage rules introduced by the federal government, along with rising interest rates since mid-2017, slowed down residential sales even further. The high property prices in Ontario have made the market more sensitive than others in the country. The adjustment period could last a few more months in this province. The incentive announced in the last federal budget for first-time home buyers is expected to have minimal impact in Ontario due to the high cost of homes. Once this measure is in place, borrowers will be able to benefit from government funding of 5% for an existing home and 10% for a new home, if specific conditions are met. The amount of the mortgage cannot exceed four times the household income to qualify for the assistance program. Furthermore, the maximum mortgage will be capped at $480,000, and maximum household income at $120,000 a year to be eligible. Given that the average price of a home in Ontario is almost $600,000, a smaller share of households would qualify. In short, don’t count on this measure to jump start the resale market. This incentive could have a marginal impact on Quebec’s The Market Keeps Growing in Quebec, Remains Stable in Ontario ECONOMIC STUDIES | MAY 16, 2019 After an already exceptional 2018, the property resale market started 2019 with a bang in Quebec. Sales and prices rose in almost all of the areas of the province in the first quarter. New construction has not let up due to the ongoing boom in the rental market. In Ontario, the adjustment period that began two years ago has given way to stable sales and prices. The Toronto market is no longer as overvalued owing to the price adjustment, but Ottawa and Montreal are still overheated. #1 BEST OVERALL FORECASTER - CANADA Annual variation in % -12 -8 -4 0 4 8 12 16 20 24 2015 2016 2017 2018 2019 Ontario Quebec 4-month moving averages Sources: Canadian Real Estate Association and Desjardins, Economic Studies GRAPH 2 Existing property prices: Relatively modest hike in Quebec compared with Ontario Average prices GRAPH 1 Existing property sales are strong in Quebec, sluggish in Ontario Sources: Canadian Real Estate Association and Desjardins, Economic Studies In thousands 60 70 80 90 100 170 190 210 230 250 270 2015 2016 2017 2018 2019 Ontario (left) Quebec (right) In thousands Sales

Transcript of The Market Keeps Growing in Quebec, FORECASTER - CANADA … · New construction kept up a good pace...

Page 1: The Market Keeps Growing in Quebec, FORECASTER - CANADA … · New construction kept up a good pace in the first quarter, stimulated by the strong rental market. The number of single-family,

SPOTLIGHT ON HOUSING

François Dupuis, Vice-President and Chief Economist • Mathieu D’Anjou, Deputy Chief Economist • Hélène Bégin, Senior Economist

Desjardins, Economic Studies: 418-835-2450 or 1 866-835-8444, ext. 5562450 • [email protected] • desjardins.com/economics

NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2019, Desjardins Group. All rights reserved.

Quebec and Ontario: A Tale of Two Dynamics Quebec’s resale market maintained strong growth at the start of the year, while Ontario’s remained stable (graphs 1 and 2). A series of measures applied by the Ontario government in 2017, including the 15% tax on foreign buyers in the Greater Toronto Area, delivered the first blow to the market. Then, stricter mortgage rules introduced by the federal government, along with rising interest rates since mid-2017, slowed down residential sales even further. The high property prices in Ontario have made the market more sensitive than others in the country. The adjustment period could last a few more months in this province.

The incentive announced in the last federal budget for first-time home buyers is expected to have minimal impact in Ontario due to the high cost of homes. Once this measure is in place, borrowers will be able to benefit from government funding of 5% for an existing home and 10% for a new home, if specific conditions are met. The amount of the mortgage cannot exceed four times the household income to qualify for the assistance program. Furthermore, the maximum mortgage will be capped at $480,000, and maximum household income at $120,000 a year to be eligible. Given that the average price of a home in Ontario is almost $600,000, a smaller share of households would qualify. In short, don’t count on this measure to jump start the resale market. This incentive could have a marginal impact on Quebec’s

The Market Keeps Growing in Quebec, Remains Stable in Ontario

ECONOMIC STUDIES | MAY 16, 2019

After an already exceptional 2018, the property resale market started 2019 with a bang in Quebec. Sales and prices rose in almost all of the areas of the province in the first quarter. New construction has not let up due to the ongoing boom in the rental market. In Ontario, the adjustment period that began two years ago has given way to stable sales and prices. The Toronto market is no longer as overvalued owing to the price adjustment, but Ottawa and Montreal are still overheated.

#1 BEST OVERALLFORECASTER - CANADA

Annual variation in %

-12-8-4048

12162024

2015 2016 2017 2018 2019

Ontario Quebec

4-month moving averages

Sources: Canadian Real Estate Association and Desjardins, Economic Studies

GRAPH 2Existing property prices: Relatively modest hike in Quebec compared with Ontario

Average prices

GRAPH 1Existing property sales are strong in Quebec, sluggish in Ontario

Sources: Canadian Real Estate Association and Desjardins, Economic Studies

In thousands

60

70

80

90

100

170

190

210

230

250

270

2015 2016 2017 2018 2019

Ontario (left) Quebec (right)

In thousands

Sales

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ECONOMIC STUDIES

2MAY 16, 2019 | SPOTLIGHT ON HOUSING

real estate market when it comes into effect in the fall. All of the details on how the program will work should be known by then.

Montreal and Ottawa OverheatingThe Toronto market is no longer as overvalued owing to the price adjustment, but Ottawa and Montreal are now overheating. This situation occurs when demand for housing is much too high in relation to the pool of properties on the market, thereby leading to a rapid increase in prices. The Canada Mortgage and Housing Corporation (CMHC) defines this state as a sales-to-new listings ratio of more than 70%.

Incidents of overheating are multiplying, and foreign investors are more active in some of Montreal’s neighbourhoods. Some people are worried about the rapid rise in prices in Montreal. Still, it has been very modest compared with the one that Toronto experienced before the correction in 2017 (graph 3). The average price is nearing $400,000 in the Greater Montreal Area, and the annual hike reached 6.5% during the first four months of 2019. According to the CMHC, the level of overvaluation remains weak in Montreal, while Toronto’s recently became moderate. Montreal’s market is far from being as problematic as Toronto’s was two years ago.

Quebec’s Rental Market DominatesNew construction kept up a good pace in the first quarter, stimulated by the strong rental market. The number of single-family, semi-detached and row house starts was down; condominium builds were also lower for the second year in a row.

New construction of rental units has been particularly active over the last few years, especially in Montreal and Quebec Census Metropolitan Areas (CMA) (graphs 4 and 5). The strong growth is affecting the Greater Montreal Area, with more than 3,000 apartments built in the first quarter of 2019. More rental units are being built than condominiums. Construction is intense on the island, especially in the Ville-Marie district. New projects in Quebec CMA were slower to get off the ground

at the beginning of this year compared with last year, but the number of apartments already underway remains extremely high (table 1). More than 1,000 rental apartments are being built in Gatineau, that is, more than during the same period last year.

Annual variation in %

-15-10-505

1015202530

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Montreal Toronto

4-month moving averages

Sources: Canadian Real Estate Association, Québec Federation of Real Estate Boards through the Centris® system, and Desjardins, Economic Studies

GRAPH 3Existing property prices: Montreal far from the rollercoaster prices of Toronto

Average prices

GRAPH 4Montreal CMA: Rental apartment construction is booming

In thousands of units

0

2

4

6

8

10

12

2001 2003 2005 2007 2009 2011 2013 2015 2017

CMA: Census Metropolitan Area Sources: Canada Mortgage and Housing Corporation and Desjardins, Economic Studies

Conventional apartment starts

GRAPH 5Quebec CMA: Rental apartment construction going strong

In thousands of units

0

1

2

3

4

5

2001 2003 2005 2007 2009 2011 2013 2015 2017

CMA: Census Metropolitan AreaSources: Canada Mortgage and Housing Corporation and Desjardins, Economic Studies

Conventional apartment starts

TABLE 1Rental apartment construction strong in some Quebec markets

CMA: Census Metropolitan AreaSources: Canada Mortgage and Housing Corporation and Desjardins, Economic Studies

RENTAL APARTMENTS UNDER CONSTRUCTION

NUMBER NUMBERVARIATION (%)

March 2018 March 2019

Montreal CMA 11,010 15,395 39.8

Island of Montreal 4,639 5,967 28.6

Ville-Marie Borough 1,910 3,002 57.2

Quebec CMA 3,964 4,296 8.4

Gatineau CMA 826 1,153 39.6

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3MAY 16, 2019 | SPOTLIGHT ON HOUSING

ECONOMIC STUDIES

Despite the rapid rise in supply, the vacancy rate in Montreal and Quebec CMA’s (graphs 6 and 7) remains well below the threshold of overbuilding set by the CMHC. Even if the rental market is booming and demand is firming up, it is important to maintain some balance by pacing the number of new projects, which seems to have been the case until now.

The hike in the number of renters helped to quickly absorb the new apartments on the market. On the one hand, buying a property is proving to be far less affordable than it was about 10 years ago because prices and interest rates have been rising since mid-2017. As a result, many young households are turning to the rental market. On the other hand, the number of people age 65 and older is rising at breakneck speed as the population ages. Demand from this age group is up, and the construction industry is adjusting to this reality.

The broader choice in rental apartments in recent years is making a difference. Since demographic trends are here to stay, the niche for fully independent seniors remains promising, especially for buildings offering a wide range of services. For many, the traditional rental market is helping to delay the move into a seniors’ residence. Even so, construction has picked up in this

niche, with 1,000 non-traditional housing for seniors launched in the first quarter of 2019 in the province of Quebec.

Fewer Condos Being BuiltEven if a lot of projects are currently under construction in the Greater Montreal Area, new condominium starts have been declining for the past two years. The number of units under construction is falling bit by bit in the Montreal CMA, especially downtown, but is still increasing across the island (table 2). Demand remains strong for this type of product, and the resale market is unable to meet the demand in several areas and in all price ranges below $800,000 per unit. The sale of new condo projects remains healthy as demonstrated by the low number of approximately 150 brand-new unsold units on the island and under 50 in the Ville-Marie district. Still, competition with the rental market is heating up as new construction is booming. Under these circumstances, condo starts will no doubt continue to trend downward this year.

The Quebec CMA condominium market is emerging from a difficult period. Construction was excessive 10 years ago. In 2012, the number of new, unsold units peaked at 1,000, and it took a long time to absorb this surplus. This is, in part, done, as approximately 400 recently built units are for sale in the Quebec region. Ready for a new wave of construction? Careful, for buyers are cautious after condo prices fell slightly in Quebec CMA. A too-steep rise in construction could jeopardize the condo market’s return to some kind of balance. The new projects have to be well positioned to attract clients. The speed and percentage of pre-sales remain good indicators of how well a new building will do. One thing is for sure: the competition will be lively given the new rental apartment complexes attracting a growing share of the clientele targeted by condos across the province (table 3 on page 4).

Hélène Bégin, Senior Economist

GRAPH 6Montreal CMA: Rental apartment vacancy rate well below overbuilding threshold

In %

0

1

2

3

4

5

6

7

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Overbuilding threshold for Montreal: 6.3%

CMA: Census Metropolitan AreaSources: Canada Mortgage and Housing Corporation and Desjardins, Economic Studies

Vacancy rate

GRAPH 7Quebec CMA: Rental apartment vacancy rate well below overbuilding threshold

In %

0

1

2

3

4

5

6

7

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Overbuilding threshold for Quebec : 6.2%

CMA: Census Metropolitan AreaSources: Canada Mortgage and Housing Corporation and Desjardins, Economic Studies

Vacancy rate

TABLE 2Condominium construction in Quebec’s main markets

CMA: Census Metropolitan AreaSources: Canada Mortgage and Housing Corporation and Desjardins, Economic Studies

NUMBER OF CONDOSUNDER CONSTRUCTION

NUMBER OF CONDOS BUILT YET UNSOLD

March 2018 March 2019 March 2018 March 2019

Montreal CMA 11,308 10,843 1,767 1,365

Island of Montreal 6,849 7,714 303 149

Ville-Marie Borough 4,316 3,978 72 47

Quebec CMA 1,333 469 249 401

Gatineau CMA 169 27 162 34

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ECONOMIC STUDIES

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2016 2017 2018 2019f 2020f

New Housing MarketNew construction ($B) 9.0 10.3 12.0 11.6 11.0Annual variation (%) 7.2 14.5 16.3 -3.3 -5.2Housing starts 38,935 46,495 46,874 45,500 43,000Annual variation (%) 2.7 19.4 0.8 -2.9 -5.5House 15,435 15,364 14,968 12,500 10,800Annual variation (%) 13.6 -0.5 -2.6 -16.5 -13.6

Single-detached 10,737 10,711 10,060 --- ---Annual variation (%) 10.7 -0.2 -6.1 --- ---Semi-detached 2,761 2,819 2,995 --- ---Annual variation (%) 4.2 2.1 6.2 --- ---Row housing unit 1,937 1,834 1,913 --- ---Annual variation (%) 55.6 -5.3 4.3 --- ---

Apartment 23,500 31,131 31,906 33,000 32,200Annual variation (%) -3.4 32.5 2.5 3.4 -2.4

Condo 1 7,849 10,804 9,860 8,000 7,500Annual variation (%) -18.0 37.6 -8.7 -18.9 -6.3Rental 1 14,105 19,256 20,503 24,300 24,000Annual variation (%) 3.8 36.5 6.5 18.5 -1.2

Conventional rental 2 10,552 13,506 16,752 20,300 19,900Annual variation (%) 14.5 28.0 24.0 21.2 -2.0Retirement home 2 3,443 5,520 3,565 4,000 4,100Annual variation (%) -15.8 60.3 -35.4 12.2 2.5

Resale marketUnit sales 78,139 82,541 86,557 91,000 88,000Annual variation (%) 5.4 5.6 4.9 5.1 -3.3Weighted average price ($k) 280 293 308 321 328Annual variation (%) 3.0 4.5 5.2 4.3 2.2Sales volume ($B) 21.9 24.1 26.4 29.2 28.9Annual variation (%) 8.4 10.6 9.2 10.8 -1.2

Other indicatorsVacancy rate for rental units3 (%) 4.4 3.4 2.3 2.5 2.8Average rent3 ($) 727 735 760 787 815Annual variation (%) 2.1 1.1 3.4 3.6 3.6Renovation spending4 ($B) 16.5 18.4 19.0 19.5 19.8Annual variation (%) 0.9 11.8 3.1 2.7 1.5

TABLE 3Quebec Housing Market Outlook 2019–2020

f: forecasts; 1 Urban centres with populations of 10,000 and over, the total is slightly below the total for provincial apartments shown above; 2 Included in rental units; 3 Three units or more,

biannual survey of the fall; 4 Maintenance and repair expenditures are excluded.Sources: Canada Mortgage and Housing Corporation, Canadian Real Estate Association, Quebec Federation of Real Estate Boards, Statistics Canada and Desjardins, Economic Studies