Housing demand not letting up: RBC
Factors include working from home, low rates
TORONTO• The Royal Bank of Canada expects residential real estate demand to remain steady in the coming months, its chief executive said Wednesday, as rock-bottom interest rates and other factors continue to drive a market in which some policymakers are already seeing signs of froth.
“While rising permit issuance is building up the new construction pipeline, we expect a lack of supply, low interest rates, elevated savings rates, continuing work-from-home arrangements and the potential resumption of immigration to underpin continued demand,” RBC president and CEO dave mckay said during a conference call for analysts and investors, noting Canadian housing activity “remains elevated.”
The comments followed Toronto-based RBC reporting first-quarter earnings that were better than expected, helped by both loan growth and a drop in the amount of money the bank had to set aside for potential loan losses.
The base-case economic outlook the bank uses for calculating expected credit costs foresees Canadian housing prices rising 4.9 per cent over the next 12 months.
yet the factors that rbc sees driving demand in the housing market are the same ones that some policy-makers are now keeping an eye on.
bank of Canada Gov. Tiff Macklem on Tuesday said the central bank is starting to see signs of “excess exuberance” in the housing market, albeit not to the level that prompted past actions such as mortgage stress tests. The governor said the economy is still coping with the pandemic, and “we need the growth we can get.”
Still, Macklem said even the bank of Canada was surprised by the strength of the housing rebound, which has been driven by factors such as a Covid-19-related desire for more space. According to the Canadian real estate Association, home sales set another all-time record in January, with the actual average sale price for the country increasing 22.8 per cent from a year earlier.
Macklem told reporters on Tuesday the central bank looks for signs of “extrapolative expectations,” which would involve people counting on the kind of “unsustainable” increases in home prices of late to continue.
“If people start to ... think that those are going to go on indefinitely, that becomes a concern,” the governor said. “We are acutely aware that in a world of very low interest rates, there is a risk that housing prices could get stretched, households could get stretched, and certainly that’s a risk we want to guard against.”
rbc, however, sees some debt-related risk abating, which helped the lender to beat earnings expectations.
The bank’s net income for the three-month period ended Jan. 31 was approximately $3.85 billion, an increase of 10 per cent from a year earlier. When adjusted for items, Canada’s biggest bank said first-quarter earnings per share were $2.69, also up 10 per cent year-over-year and better than the $2.28 consensus of analyst estimates.
Profit from rbc’s personal and commercial banking unit rose six per cent from a year ago, to nearly $1.8 billion, as it grew both Canadian deposits and loans during the quarter. An improved outlook for credit quality also allowed rbc to release $97 million in reserve funds, with the bank’s total provisions for credit losses for the quarter $110 million, down 74 per cent from a year earlier.
Mckay pointed to the progress being made on vaccines as a reason for its improving outlook.
“We’re growing in confidence in the trajectory of the vaccination of our population and the mitigation of risk,” he said in response to an analyst’s question. “We’re not there yet, so we’re still waiting to see the execution of this, but we’re getting more confident that the timing is starting to narrow around when this will happen.”
rbc’s capital-markets business reported record net income of approximately $1.07 billion for the first quarter, up 21 per cent from a year ago. This, the bank said in a press release, was mostly because of higher revenue, which was driven up by more stock trading and lower loan-loss provisions.
Also reporting an earnings beat on Wednesday was Montreal-based National bank of Canada, which said adjusted EPS for the quarter ended Jan. 31 was $2.15, up 26 per cent from a year earlier and better than the $1.71 analysts had anticipated.
In keeping with what its rivals have been reporting this earnings season, National said that its loan-loss provisions had fallen in the quarter, decreasing nine per cent year-over-year to $81 million.
“While uncertainty remains on the exact path and timing of a full recovery, the economy is adapting to a new reality and creating an environment conducive to revenue growth,” said Louis Vachon, president and CEO of National, during his bank’s conference call on Wednesday. “With more people working from home, coupled with historically low interest rates, we continue to see significant pentup demand in the housing market.”