The three faces of Canada’s increasingly strange housing market

Housing has split three ways in Canada: bubbly in Toronto and Vancouver, decline in the oilpatch and normal everywhere else

A condo construction site in Vancouver

A condo construction site in Vancouver. (Ben Nelms/Bloomberg/Getty)

The Bank of Canada’s benchmark interest rate is a quarter point above its record low primarily because the economy is weak. But there is another reason. Counterintuitively, the central bank says lower interest rates are necessary to reduce the risk of a housing bust. As thousands of suddenly unemployed energy workers seek new jobs, they will be able to do so without worrying about a spike in the cost of their mortgages.

Is it working? Seems so. National Bank this week said housing affordability stabilized in the first quarter, when mortgage payments on a typical Canadian home as a percentage of income increased by only 0.1 percentage points. In six of the 10 cities surveyed by the lender, the ratio declined, meaning it is getting easier for most Canadian homeowners to manage their mortgage payments. There’s never been a better time to buy a home in Calgary, at least for those who still have jobs. In Montreal, affordability is the best in a decade.

The annual change tells a slightly different story. Mortgage payments as a percentage of income (MPPI) rose 0.6 points, as a 6.6% increase in house prices outweighed lower mortgage rates and a higher average median income. That’s almost entirely Toronto and Vancouver. There is an argument to be made that the Bank of Canada’s policies are making homes more expensive in those two cities by stoking already strong demand. In both markets, non-condo affordability is the worst on record, even though it’s never been cheaper to borrow money.

Bubbly markets in two big cities will trouble policy makers. A bust in either city would hurt banks, which could damp lending. But that risk isn’t big enough to prompt higher interest rates. Carolyn Wilkins, the No. 2 at the Bank of Canada, told me in an interview that Canada’s housing market is trifurcated, or like a triple-layer cake: Toronto and Vancouver; Calgary and other places affected by the collapse of oil prices; and everywhere else, where housing prices are flattening out. “To speak about just one market doesn’t work,” Wilkins said. “The best thing we can do is to support the transition of the Canadian economy and leave it to the authorities who have the macroprudential tools related to the housing market.”

Macroprudential tools are those that the federal government has deployed sporadically since the financial crisis to try to take the froth out of the housing market. Most recently, it raised the minimum down payment for home loans above $500,000. The measure will affect demand in Toronto and Vancouver most. The time required to raise a downpayment for a typical home will rise by 11 months in Toronto and by 34 months in Vancouver, according to National Bank.

The pre-crisis collapse of the U.S. housing market surprised people because they didn’t see the frenzy had spread to almost every major market. The data in Canada suggest there has been no such contagion. The risks are localized and it will be up to authorities other than the central bank to contain them.