The further slowdown in the monthly pace of gains in January suggests house price inflation will soon peak at a little more than 10%.
Tightness of supply points to further house price gains
- The further slowdown in the monthly pace of gains in January suggests house price inflation will soon peak at a little more than 10%.
- The 0.3% m/m rise in the Teranet House Price Index equated to a larger 0.6% m/m increase in seasonally-adjusted terms, but that was still a sharp slowdown from the average monthly gain of 1.2% in the preceding three months. The annual rate of house price inflation only edged up to 9.6%, from 9.4%.
- There were clear signs that price gains are starting to slow in many cities. Due to only small monthly increases, the annual pace of house price inflation slowed to 10.0% in Toronto, from 10.3%, and to 19.6% in Ottawa, from 19.7%. House price inflation generally rose elsewhere, but at a slower pace than in preceding months. It rose to 15.8% in Montreal, from 15.2%, and to 7.3% in Vancouver, from 7.1%.
- This apparent loss of momentum may seem surprising given the January home sales data suggests that the housing market was the tightest on record, with the sales-to-new listing ratio surging at the start of the year (See Chart 1.) With home sales at a record high in January, it is hard to make the case that the latest coronavirus restrictions are behind slower price growth. The explanation may simply be that, with house price inflation at double-digit rates in many cities, house prices already reflect the sharp fall in borrowing costs in the past year and so there is now much less scope for prospective buyers to bid up prices.
- Nevertheless, limited supply implies prices will continue to rise at a decent clip by pre-pandemic standards. Moreover, given the strength of oil prices, the national rate of price inflation should get a boost from stronger gains in markets including Calgary and Edmonton, where house price inflation is currently close to zero.
- Overall, we expect house price inflation to continue to edge higher to a little more than 10% in the next couple of months. But with affordability stretched in many cities and mortgage rates likely to start rising again in the coming quarters, we expect house price inflation to slow to 5% by the end of 2021 and then to 2.5% by the end of 2022, which would put it broadly in line with average earnings growth. (See here.)
Chart 1: House Prices & Sales-to-New Listing Ratio
Sources: CREA, Teranet, Refinitiv
Table: Teranet-National Bank House Price Indices
Sources: Refinitiv, CE (*Seasonally Adjusted)
Stephen Brown, Senior Canada Economist, +1 416 874 0514, firstname.lastname@example.org