canadian-home-prices Photo: Tiago Rodrigues/Unsplash

A widely-watched Canadian home price index shot up nearly 11 percent annually in March as major markets across the country continue to experience exceptional levels of sales activity.

Released earlier this week, the latest reading from the Teranet-National Bank House Price Index represented the strongest 12-month gain since September 2017 and marked the eighth-straight acceleration in annual home price gains.

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Eleven major housing markets spread across the country are tracked by the index, which is regarded as the gold standard for measuring Canadian home price appreciation. March’s reading had Halifax, Hamilton and Ottawa-Gatineau recording the highest annual gains in the country, with Montreal, Toronto and Victoria also posting double-digit percentage growth.

Halifax came out on top with a 22.5 percent annual gain, while Victoria only recorded a 10.5 percent 12-month gain. The remaining markets that make up the index — Quebec City, Vancouver, Winnipeg, Edmonton and Calgary — all saw annual price growth, ranging from the low single-digits for the Alberta cities to just over eight percent for the Quebec capital city.

The index measured price increases in all 11 markets on a monthly basis too.

The Teranet-National Bank index is known to lag behind other widely used home price tracking tools, including the monthly average home sale prices published by the Canadian Real Estate Association (CREA) and local boards.

This is because the index is compiled using a repeat sales methodology that works by tracking the price change between the two most recent sales of the same property. The index uses prices entered into public land registries in the Canadian markets it tracks. These often are slower to respond to market changes because sale price data is not added to land registries as quickly as it’s entered into the MLS systems used by real estate boards.

While the overall index and its composite markets continue to record healthy appreciation, there are signs on the horizon that a price growth slowdown is looming.

Recent commentary from housing market observers has highlighted the potential impact of proposed changes to Canada’s stress test for uninsured mortgages on home prices. The new rules proposed by the country’s financial regulator, OSFI, would increase the stress test’s qualifying rate for uninsured mortgages to 5.25 percent, or two percentage points above the posted rate.

These changes are likely to be rolled out by June 1st, but the immediate impact could end up being quite mild.

“The proposed rise in the uninsured mortgage qualifying rate could take some of the heat out of the market, but we continue to anticipate further gains in house prices this year,” Capital Economics’ Stephen Brown wrote this week following the release of the new home price data.

Instead, Brown believes home prices are most vulnerable to interest rate hikes.

“[T]he clear risk is that [home prices] will become increasingly vulnerable to interest rate hikes further down the line,” he added.

The chief concern is that rising rates could negatively impact over-leveraged homeowners who will then struggle to make their monthly mortgage payments. This is an especially troublesome prospect following the major home price run-up and frenzied pace of buying that markets across the country have been experiencing.

An interest rate hike could also impact home prices by taking potential buyers out of the market at a time when supply is increasing, leading to price declines.

The Bank of Canada, which is responsible for setting the mortgage market-influencing overnight rate, has previously stated that rate hikes are a long way off. However, in an announcement yesterday it appeared to move up its potential timeline for increasing rates on the heels of a more upbeat economic outlook for the country.

After the central bank’s announcement, mortgage rate comparison site Ratehub.ca commented that higher rates are likely coming “sooner than expected.”

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