It is becoming more well known how interconnected credit markets have become, and with that many global property markets are following a very similar housing cycle. With global credit tightening we are seeing widespread reports that once hot housing markets such as Sydney, Manhattan, Denver, London, and even Hong Kong have gone cold.
Two Canadian markets which have historically followed a very similar trajectory is Vancouver & Toronto. However, more recently pundits or bank economists are suggesting the two markets have diverged with Toronto now rebounding and Vancouver mired in a slump which has pushed sales to an 18 year low.
However, historical data suggests Toronto may simply be lagging behind Vancouver’s property cycle. When looking at a 12 month rolling average of housing sales we can see how closely correlated the two cities are. The most recent run-up shows Vancouver home sales peaked in July 2016. Toronto home sales peaked in April 2017, a nine month lag between the two cities. While Toronto is experiencing a recent uptick, sales remain weak.
Further analysis by The Six housing Sense and Better Dwelling also shows Toronto appears to trail Vancouver’s major price gains and losses by roughly three quarters. Here is the year over year percentage price changes for detached benchmark homes in each city starting in January 2015.
From the two data lines we can see that Toronto appears to trail Vancouver’s major price gains and losses by roughly three quarters. To better illustrate this point, the next chart shifts Toronto’s timeline by nine months to align with Vancouver. (Vancouver’s data is from January 2015 to the present, Toronto’s is from October 2015 to the present).
The problem most market watchers tend to have is they focus on housing markets in isolation. Unfortunately, housing- particularly in global cities, functions like any other financial market and does not function in isolation. What happens in other capital markets across the world has an impact on Vancouver & Toronto. Such as the recent tightening of global liquidity thanks to the Federal Reserve hiking interest rates and reducing their balance sheet through Quantitative Tightening. This has also played a role in the recent spike in global bond yields which in turn has pushed the Canada 5 year bond to a fresh seven year high. As a result, mortgage rates have moved higher and have squeezed local housing affordability even more.
This has a lot less to do with local zoning regulations than it does with global monetary policy and credit conditions. Mortgage credit growth in Canada is now at an eighteen year low, and debt service ratios have hit a 10 year high. This does not bode well for further price appreciation. Which is also why we are seeing developers hit the pause button on new housing starts, the annual pace of Canadian housing starts fell to their lowest level in nearly two years.