Taking a closer look at the mortgage statistics of Canada.

For most Canadians, the following narrative is well known. You graduate from school, land your first job, get married, buy your first house, start a family and after a number of years, move up to a larger house to accommodate your growing family.

However, there are many indications that this cycle that dominated the Canadian housing market for decades, is breaking.

Gravity-defying home valuations, exacerbated by tighter mortgage insurance regulations, have worked to price out a notable portion of the first-time homebuyers’ market. At the same time, an asymmetrical trajectory of price appreciation is starting to paralyze the ‘move up’ market. The value of bigger and pricier properties is rising notably faster than less expensive properties – widening the gap between starter home and dream house.

These dynamics go a long way in explaining the current stage of the housing market in Canada and provide some hints regarding the nature and trajectory of any future market adjustment.

 Hidden behind the Average

When it comes to housing activity in Canada, average numbers hide more than they reveal, says Benjamin Tal, CIBC economist. The 5% increase in the average annual home price over the past year masks many tales such as falling prices in Saint John, Quebec and Victoria, and still very strong markets in centres such as Toronto, Vancouver and Calgary. More than one-quarter of the sales are now in cities that see prices rising by less than the current rate of inflation.

More robust activity in cities with above-average prices also works to bias the widely quoted average price. In fact, the spread between the simple average price measure and the weighted measure (which compensates for changes in provincial sales activity by taking into account provincial proportions of privately owned housing stock) has been widening over the past eighteen months, suggesting that a growing proportion of price increases in Canada is due to activity in large and more pricy cities.

Not moving up

In Vancouver, almost all of the increase in the average price of single-detached units since 2010 was due to a run-up in the value of properties over the $1.1 Million mark. However, given that the average price of single-detached units in the first time homebuyer category is north of $1 million – upgrade options in the city are becoming even less affordable.

With limited move up options, it’s no surprise then that many Canadians choose to renovate their existing homes. Over the past five years, spending on home renovations as a share of total residential investment averaged close to 46% - by far the largest share on record.

Read more: http://research.cibcwm.com/economic_public/download/if_2014-0908.pdf