Photo: James Bombales

A new stress test for uninsured mortgages in Canada that was introduced at the beginning of this year has raised the likelihood of a national housing downturn in the near-term.

But, the chances of a severe downturn and significant home price declines over the next year are still quite low, according to RBC Economics’ Canadian Housing Health Check, released last week.

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“Volatility generated by the new stress test eroded the near-term risk profile of several major markets including Toronto, Vancouver and Calgary. Yet none of these markets appear to be at risk of an imminent severe downturn,” reads the report.

RBC’s health check list assesses key indicators of Canada’s housing market that historically have offered early red flags of potential imbalances.

For RBC, affordability is the most meaningful indicator of underlying market stress, as it takes into consideration interest rates which are at historically low levels.

According to RBC’s aggregate housing affordability measure, home ownership costs accounted for 48.3 per cent of average Canadian household income in Q4 2017. A measure above 45 per cent is considered in the danger zone, suggesting that there’s greater-than-average market stress for buyers in Canada.

“Affordability is most stretched for single detached homes in Canada’s largest markets, although condo affordability (41.1 per cent) also has deteriorated significantly in the past year,” says RBC.

Out of Canada’s four largest housing markets (Toronto, Vancouver, Calgary and Montreal), high homeownership costs in Toronto and Vancouver land these cities in the danger zone for affordability, and Montreal is in concerning territory.

RBC notes that if interest rates were to continue rising this year, that would erode affordability further in some of Canada’s major markets.

In addition to affordability, the sales-to-new listings ratio is another indicator RBC uses to gauge market stress and price pressure.

During most of 2017, the national sales-to-new listings ratio fell within balanced market territory after spending 2016 in sellers’ market territory.

“The national ratio spiked temporarily as markets rallied across the country late last year ahead of the new stress test on January 1 though it has since returned to balance,” reads the report.

Meantime, since the province’s Fair Housing Plan was introduced in spring 2017, a rebound in new listings in Ontario has returned Canada’s months of inventory back to its long-term average of 5.3 months during February and March 2018.

“Demand-supply balance indicators for the existing home market, therefore, continue to suggest little in the way of any imminent large-scale drop in prices in the national market,” says RBC.

Prices in Toronto have moderated since mid-2017 and the market is healthier now than it was a year ago. However, prices in Vancouver are on the rise and extremely poor affordability is the city’s top area of vulnerability.

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