Housing Market Digest – Atlantic Canada
September 2016
Resale Market
Data from the Canadian Real Estate Association
show that resale activity in Atlantic Canada has
strengthened during the past year, due to further
reductions in mortgage interest rates. While
activity in the region is strong in historic terms, the
sales rates have not set a new record high this
year (which has occurred for Canada as a whole).
Average resale house prices and the rates of
increase are somewhat variable from month to
month. Therefore, in the chart below, a trend line
has been added. House price growth in Atlantic
Canada was at its most rapid during the prerecession period: demand was increasing and new
sales records were being set. But, the average
price has fallen slightly during the past three
years. This has occurred despite the relatively
strong sales rates.
The recent weakness for prices can be understood
once we look at the supply side. As is shown in
the next chart, the flow of new listings into the
region’s resale markets has been much larger
during the past decade than it was previously.
While the flow of new listings was relatively flat (at
a high level) during and after the recession, there
has been further growth of supply during the past
five years.
Data on the sales-to-new-listings ratio (“SNLR”) is
useful in interpreting price growth, and in
characterizing the state of the resale market.
During the past four years, the SNLR for Atlantic
Canada has averaged 42.8%. By contrast, during
2000 to 2009 the average was 55.9%. The chart
below illustrates that there is a relationship
between the SNLR and the rate of price change:
due to the volatility of the data, this chart
emphasizes the trends for price growth (the thick
blue line) and the SNLR (the thick brown line).
During the middle part of the period shown in this
chart, the region was in a “sellers’ market” state,
with high SNLRs corresponding to rapid price
growth. During the past few years, the data has
indicated a transition to a “balanced market”
condition and then to a “buyers’ market”. However,
the SNLR has recently increased, averaging
49.6% during the past four months, as sales have
increased but the flow of new listings has been
reduced. The recent data hints that prices are
stabilizing. If these conditions persist, then resale
house prices should soon begin to rise, most likely
at a moderate rate.
Housing Starts
Housing starts in Atlantic Canada vary widely from
month to month, but it is clear that they move in
long cycles. The chart shows that total housing
starts were relatively stable in the area of 12,000
units per year during 2002 to 2012. Since then
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Housing Market Digest – Atlantic Canada
September 2016
there has been a substantial slowdown: over the
past 12 months, the average rate has been 7,400,
a drop of about 40% from the prior trend level.
The long period of strong starts is related to the
prolonged “sellers’ market” for resales, with its
high SNLR and rapid price growth: the resale
market was signaling that there was a need for
more supply and the new construction market
provided that supply. Now that there is more
supply in the resale market, there is less need for
new construction. This combination of data from
the Atlantic region provides a strong illustration
that the housing market operates as economic
theory says it should.
The chart below divides housing construction into
three market segments. Low low-rise starts
(single-detached, semi-detached and town homes)
have fallen substantially from the prior peak, with
the trend line down by about 50%. On the other
hand, apartment starts were slower to respond to
the evolving conditions, but then rose substantially
(they went from being a small part of the total to a
one-third share by 2013 and 2014. Apartment
starts have slowed recently. Rural activity has
diminished in importance during the past halfdecade.
Employment Trends
The next chart uses data from Statistics Canada’s
Labour Force Survey (“LFS”). It shows
percentages of the adult population that are
employed (“the employment-to-population ratio” or
the
“employment
rate”).
Historically,
the
employment rate in Atlantic Canada has been
lower than for all of Canada, but the gap has been
reduced, reflecting economic improvement in the
region. During the first half of the period shown the
gap was typically eight to nine percentage points;
as of August, the employment rate in the region is
55.8%, or about five points below the 60.9% rate
for all of Canada.
We should expect housing starts to be influenced
by two major factors: job creation and the supplydemand situation in the resale market. The next
chart contrasts the region’s employment rate and
housing starts (emphasizing trend lines rather than
the actual, volatile data). This shows a weak
relationship between the employment situation
and starts. But, if we look at the employment
situation and the supply situation in combination,
both of these factors are exerting the expected
influences: starts have slowed because fewer jobs
are being created and there is more competition in
the resale market.
Compared to a year ago, the level of employment
in Atlantic Canada is estimated to have fallen by
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Housing Market Digest – Atlantic Canada
September 2016
6,400 jobs (-0.6%). Within the LFS, Statistics
Canada is assuming that the adult population has
grown by 0.4% over the past year. The estimate
that jobs have been lost combined with the
assumption of modest population growth means
that the employment rate has fallen.
Statistics Canada’s has a second survey of the
employment situation (the Survey of Employment,
Payrolls and Hours, or “SEPH”). It can be
illuminating to compare the two data sets. The two
surveys have been painting different pictures for
most of the period shown. SEPH has shown flat
employment since early 2011, while LFS showed
gains during 2011 followed by job losses.
One potential reason for the different estimates is
that the LFS is based on a sample survey, and is
sometimes wrong. Statistical theory tells us that
about one-third of the time the LFS will misestimate monthly job creation by non-trivial
amounts (under-estimating or over-estimating job
growth). During 2011, there were two months with
suspiciously large growth numbers that appear to
be statistical “out riders”: job creation for the year
was probably over-estimated. On the other hand,
during the last three years, there have been nine
months with unexpectedly large estimates of job
losses and fewer months (perhaps three) with
unexpectedly large job gains. The net effect is that
since late 2013 there has been an over-estimate
of job losses. For the past three years the LFS
hints at a flat level of employment for Atlantic
Canada (apart from three short-lived gyrations)
population was flat two years ago, but that there is
now moderate growth (about 0.4% per year).
In general, SEPH appears to provide a more
realistic picture of job growth in Atlantic Canada,
but the LFS is released much sooner and SEPH
gets little attention.
Interest Rates
Bond yields have shown only minor variations
during the past three months, in the area of 0.7%
for 5-year GoCs. The opinion estimates are
unchanged for the mortgage market: 2.5% for 5year fixed (versus 4.64% for the “posted” rate that
is published by the Bank of Canada) and 2.4% for
5-year variable. These are mortgage interest rates
after typical discounts by major lenders
The big question for the housing market is – what
is the new normal for interest rates? A lazy
response would be that they will tend to “revert to
the mean”. But, history shows us that it is very rare
for bond yields to be anywhere close to their
moving averages. In this chart, with 35 years of
data, there are four periods during which the yields
moved meaningfully towards the moving average,
and those movements were short-lived. The last
time was nine years ago. In short, the past is not a
reliable guide to the future.
Disclaimer of Liability
We have discussed this issue in more detail, for
Canada, here. Our conclusion is that the size of
the errors for Canada could be reduced by
increasing the sample sizes in the largest urban
areas of Canada.
This report has been compiled using data and
sources that are believed to be reliable. Mortgage
Professionals
Canada
Inc.
accepts
no
responsibility for any data or conclusions
contained herein.
Secondly, the LFS estimates are tied to
assumptions about population growth. The
assumptions being made for Atlantic Canada look
“about right”: it is being assumed that the region’s
Completed by Will Dunning, Chief Economist,
Mortgage Professionals Canada
Copyright: Mortgage Professionals Canada 2016
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