SPOTLIGHT ON HOUSING

François Dupuis, Vice-President and Chief Economist • Hélène Bégin, Senior Economist

Desjardins, Economic Studies: 418-835-2450 or 1 866-835-8444, ext. 5562450 • desjardins.economics@desjardins.com • desjardins.com/economics

NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2017, Desjardins Group. All rights reserved.

Growth in Quebec Not ExcessiveThe statistics released by the real estate boards in May made headlines for a reason. Sales of single-family homes in Quebec surged 10% compared with the same period last year, and condo sales shot up by 24%. Last month, total sales grew 15% in Greater Montreal, 25% in Gatineau and 11% in Quebec CMA. However, cumulative results since the start of 2017 are not as impressive as May’s figures (graph 1). A few metropolitan regions even posted drops in sales.

Nevertheless, across the province, purchases of existing properties is maintaining an upward trend (graph 2). The number

of homes for sale has fallen significantly in the last year, and some markets have become sellers’ markets. This is the case for single-family homes, which are in a slight shortage in Greater Montreal (graph 3 on page 2). Buyers have to act quicker and be prepared to pay the asking price, and sometimes more, to get the home they want. Although there is less of a surplus in the condo market than in the past, there is still a surplus in the six major urban areas in Quebec. The market is now faring better on the Island of Montreal and in Laval, but it is still facing difficulties elsewhere in Quebec.

With sales on the rise and a smaller pool of available properties, price increases accelerated to nearly 5% recently for both

The Residential Market Shifts into Second Gearin Quebec, Adjusting in Ontario

ECONOMIC STUDIES | JUNE 19, 2017

The health of Quebec’s real estate sector continues to surprise. Existing homes sales are up and price increases are gaining momentum. Limited supply in the resale market has spurred new construction to keep up with demand. In Ontario, stratospheric price increases have led the provincial government to go so far as to apply a 15% tax when a foreign buyer acquires a property in the Greater Toronto Area, similar to measures taken in Vancouver in summer 2016. However, the Quebec housing market is far from overheating and such restrictive measures aren’t needed to calm the situation.

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GRAPH 1 Sales of existing properties: cumulative sales for 2017 were not positive throughout the CMA

Annual variation in %

-30

-20

-10

0

10

20

30

Montreal Quebec Gatineau Sherbrooke Saguenay Trois-RivièresMay January to May

CMA: Census Metropolitan Area Sources: Québec Federation of Real Estate Boards via the Centris® system and Desjardins, Economic Studies

GRAPH 2 Fewer new properties for sale on the existing maket, but sales remain strong

In thousands

65

70

75

80

85

140

145

150

155

160

165

2012 2013 2014 2015 2016 2017

New listings (left) Sales (right)

In thousands

3-month moving averages

Sources: Canadian Real Estate Association and Desjardins, Economic Studies

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2JUNE 19, 2017 | SPOTLIGHT ON HOUSING

single-family homes and condos (graph 4). The short depreciation period observed a year ago for condos has quickly dissipated due to renewed demand, primarily in Greater Montreal. Meanwhile, condo prices continued to fall in the urban areas of Quebec, Saguenay and Trois-Rivières.

According to a report by the Québec Federation of Real Estate Boards, the situation is different for vacation homes. Sales of condos near the water or sports activities, or in a highly sought-after area for relaxation, have declined, and the average selling time has reached 311 days. In contrast, demand remains high for single-family cottages, but it takes an average of 199 days to close a sale. The second home market can move at its own pace, and that’s currently the case for vacation condos, which have seen a slowdown in sales.

A Generally Balanced Market in Quebec The ratio of sales to new listings by real estate agents provides a more detailed look at market conditions. A ratio of 40% to 60% reflects a generally balanced market, as is currently the case in

Quebec (graph 5). The shortage in Ontario that has persisted since 2015 seems to be dissipating following announced measures to slow the market in the Greater Toronto Area, which resumed a balance in May. In fact, the number of sales in the Greater Toronto Area dropped by 25% compared with April. The Toronto real estate market seems to have begun to adjust. It remains to be seen what the impact of the 15% tax in effect since April 20 on purchases by foreign investors remains will have in the coming months.

Quebec’s situation is hardly comparable to the surge in prices in Ontario, which began several years ago (graph 6). Even if some foreign buyers were to move to Montreal due to the tax imposed in Vancouver last year, and more recently in Toronto1, the CMA’s housing market isn’t at risk of catching fire in the short term. Montreal has a ways to go before confronting an overheated market, which would lead to a spike in prices.

GRAPH 3 Slight shortage of single-family homes in Montreal CMA

Sellers/buyers ratio in the first quarter of 2017

In number

0

5

10

15

Montreal Quebec Gatineau Sherbrooke Saguenay Trois-RivièresSingle-family Condo

Shortage

Surplus

Balance

CMA: Census Metropolitan Area Sources: Québec Federation of Real Estate Boards via the Centris® system and Desjardins, Economic Studies

GRAPH 4 Home prices are up overall

Average prices

Annual variation in %

-4

0

4

8

12

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Single-family Condo Total

Sources: Québec Federation of Real Estate Boards via the Centris® system and Desjardins, Economic Studies

In %

20

30

40

50

60

70

80

90

100

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Ontario Quebec

Sales/new listings ratio

GRAPH 5 The resale market is balances in Quebec

Balance

Surplus

Shortage

Sources: Canada Mortgage and Housing Corporation, Canadian Real Estate Association and Desjardins, Economic Studies

4-month moving averages

Annual variation in %

-4

0

4

8

12

16

20

24

2012 2013 2014 2015 2016 2017

Ontario Quebec

4-month moving averages

GRAPH 6 The rise in home prices in Quebec is well below that of Ontario

Average prices

Sources: Canadian Real Estate Association and Desjardins, Economic Studies

1 Toronto’s Real Estate Market: Restrictive Measures Finally Being Imposed, Desjardins, Economic Studies, Economic News, April 20, 2017, 1 p.

3JUNE 19, 2017 | SPOTLIGHT ON HOUSING

ECONOMIC STUDIES

New Construction AdjustsIn any case, new construction has quickly adjusted to the hike in the Montreal CMA. In the first five months of the year, housing starts rose 39% compared with the same period last year. All market segments contributed to this increase. The condo market was particularly active: 3,301 units began construction between January and May 2017, compared with 1,856 units during the same period in 2016. Elsewhere in Quebec, i.e., outside Greater Montreal, condo construction was much more limited, with approximately 400 units breaking ground since the start of the year.

Overall, new construction had an excellent start to the year in Quebec. The annualized number of housing starts reached nearly 44,000 units, an increase of approximately 15% compared with 2016. In Ontario, new construction gained momentum compared with last year, but more recent statistics point to a slight slowdown (graph 7). New starts should reach 76,000 in 2017, a similar level as in 2016.

A Favourable Economic Situation The positives for Quebec households continued to accumulate. The consumer confidence index reached unexpected levels, attaining its highest peak since the 2008-2009 recession (graph 8). The job market also saw a notable improvement with the unemployment rate dropping to 6.0% in May (graph 9), its lowest level in more than 30 years. Federal relief measures in effect since 2016, such as the Enhanced Universal Child Care Benefit and tax breaks continued to benefit households. At the provincial level, the complete elimination of the health contribution, for which the 2016 retroactive reimbursement will be made soon, will free up $473M for Quebecers this year.

In Ontario, the job market improved less dramatically (graph 10), as did consumer confidence. However, the situation remains positive for households, as illustrated by the healthy housing market. It remains to be seen whether the restrictive measures aimed at slowing the pace of the real estate market in the Greater Toronto Area will be sufficient to temper the housing sector.

GRAPH 7 Housing starts seem to be slowing down

In thousands

25

35

45

55

65

75

85

95

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Quebec Ontario

3-month moving averages

Sources: Canada Mortgage and Housing Corporation and Desjardins, Economic Studies

GRAPH 8 Quebecer confidence is at its highest level in 10 years

2014 = 100

5060708090

100110120130140150

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Quebec Ontario

Sources: Conference Board of Canada and Desjardins, Economic Studies

GRAPH 9 Strong improvement in Quebec’s job market in the last year

In %

3,850

3,900

3,950

4,000

4,050

4,100

4,150

4,200

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

2010 2011 2012 2013 2014 2015 2016 2017

Unemployment rate (left) Number of jobs (right)

In thousands

Sources: Statistics Canada and Desjardins, Economic Studies

GRAPH 10 Job growth was less impressive in Ontario

In %

6,4006,5006,6006,7006,8006,9007,0007,1007,200

5.56.06.57.07.58.08.59.09.5

2010 2011 2012 2013 2014 2015 2016 2017

Unemployment rate (left) Number of jobs (right)

In thousands

Sources: Statistics Canada and Desjardins, Economic Studies

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4JUNE 19, 2017 | SPOTLIGHT ON HOUSING

Interest Rate Hikes Are on the HorizonGiven the rebound of the Canadian economy and several other encouraging signs, key interest rate hikes should start soon. Initially anticipated for 2018, monetary firming could begin in October 2017, and an initial key rate hike could occur as soon as July. North American bond yields, which have a significant impact on mortgage rates across the country, will begin to rise soon. The posted rate for a 5-year term, which is currently 4.74%, could jump to 5.80% by the end of 2018, and a similar increase will likely affect 1-year and 3-year terms.2

Impacts of an interest rate hike:

f An interest rate hike will have an immediate effect on holders of variable-rate loans and personal lines of credit.

f For fixed-rate mortgage loans, the effects will be spread out over their maturities, as the highest interest rates will be required at renewal based on the term initially chosen.

f The full impact of an interest rate hike will take some time to be felt for loans that are already granted.

f New loans will be directly impacted, and this will be problematic for first-time buyers, who generally have a low down payment.

While the economic situation remains favourable for households in Quebec and Ontario, the gradual increase in the cost of borrowing will likely cool the housing sector somewhat. An interest rate increase will limit demand for housing, but not significantly. A slowdown is expected, particularly among first-time buyers. For others, the impact will be felt when they renew their mortgage loans.

Hélène Bégin, Senior Economist

2 Canadian Key Rates May Rise Shortly, Desjardins, Economic Studies, Retail Rate Forecasts, June 15, 2017, 5 p.

5JUNE 19, 2017 | SPOTLIGHT ON HOUSING

ECONOMIC STUDIES

2014 2015 2016 2017f 2018f

New Housing MarketNew construction ($B) 6.3 5.8 5.9 6.5 6.2Annual variation (%) -3.9 -7.8 1.5 10.2 -4.6Housing starts 38,810 37,926 38,935 44,000 42,000Annual variation (%) 2.8 -2.3 2.7 13.0 -4.5House 15,707 13,593 15,435 17,500 16,800Annual variation (%) -8.1 -13.5 13.6 13.4 -4.0

Single-detached 11,227 9,698 10,737 --- ---Annual variation (%) -14.6 -13.6 10.7 --- ---Semi-detached 3,083 2,650 2,761 --- ---Annual variation (%) 8.7 -14.0 4.2 --- ---Row housing unit 1,397 1,245 1,937 --- ---Annual variation (%) 24.6 -10.9 55.6 --- ---

Apartment 23,103 24,333 23,500 26,500 25,200Annual variation (%) 11.8 5.3 -3.4 12.8 -4.9

Condo 1 12,893 9,571 7,849 9,300 8,500Annual variation (%) 13.1 -25.8 -18.0 18.5 -8.6Rental 1 8,939 13,588 14,105 15,500 14,500Annual variation (%) 7.3 52.0 3.8 9.9 -6.5

Conventional rental 2 6,204 9,218 10,552 12,000 10,500Annual variation (%) -6.5 48.6 14.5 13.7 -12.5Retirement home 2 2,438 4,089 3,443 3,500 4,000Annual variation (%) 72.8 67.7 -15.8 1.7 14.3

Resale marketUnit sales 70,620 74,122 78,172 82,000 80,000Annual variation (%) -0.8 5.0 5.5 4.9 -2.4Weighted average price ($k) 271 275 283 297 303Annual variation (%) 1.3 1.5 2.9 4.8 2.0Sales volume ($B) 18.8 20.2 22.1 24.4 24.2Annual variation (%) 0.4 7.5 9.8 10.0 -0.5

Other indicatorsVacancy rate for rental units3 (%) 3.7 4.3 4.4 4.6 4.5Average rent3 ($) 691 712 727 741 756Annual variation (%) 1.8 3.0 2.1 1.9 2.0Renovation spending4 ($B) 11.9 12.4 12.6 13.0 13.1Annual variation (%) 4.9 4.2 1.9 2.8 0.8

TABLEQuebec Housing Market Outlook 2017–2018

f: forecasts; 1 Urban centres with populations of 10,000 and over, the total is slightly below the total for provincial apartments shown above; 2 Included in rental units; 3 Three units or more,

biannual survey of the fall; 4 Maintenance and repair expenditures are excluded.Sources: Canada Mortgage and Housing Corporation, Canadian Real Estate Association, Quebec Federation of Real Estate Boards, Statistics Canada and Desjardins, Economic Studies