There has been a lot of media coverage around the state of the Canadian housing market. Some of it has been unduly critical, while a lot of it has been overly optimistic. The truth, however, lies somewhere in-between. Whether you agree with some/all of these analyses or not, there is definitely something occurring all across Canada’s housing sector. Is it a bubble waiting to burst? Let’s find out!
A Year In Perspective
Over the course of last summer – and probably even prior to then, there were rumbles that Canada’s housing market had entered “bubble territory”. In fact, the negativity surrounding our real estate sector was so bad, that several housing market analysts and investors from our neighbour to the south had actually “shorted” the Canadian real estate market, hoping to make a killing when (not IF) the bottom fell!
Well, those predictions never came to fruition, and over a year later, it appears the sky hasn’t fallen, and real estate across Canada hasn’t tumbled. However, that doesn’t mean we haven’t seen turbulent times over the past several months. And neither does it guarantee that it’ll be blue skies and smooth sailing in the coming months.
Canada has seen a number of housing market-impacting milestones over the past year or so:
- April 20th, 2017: Ontario introduced its Fair Housing Plan that expanded rent control, introduced a foreign-buyer tax (“Non-Resident Speculation Tax”) and focuses on more affordable housing
- Jan 1st, 2018: Canada’s Office of the Superintendent of Financial Institutions tightened mortgage underwriting rules, making it that much more difficult for individuals with weaker financial standings to qualify for a mortgage
- Jan 16th, 2018: A majority of the Big Six banks raised their 5-year fixed mortgage rates in anticipation of a rate hike by Canadas central bank
- Jan 17th, 2018: The Bank of Canada (BoC) raised interest rates on expectations of a continued strengthening of the Canadian Economy
- Feb 21st, 2018: British Columbia proposes housing speculation taxes, similar to those in Ontario, and increasing the foreign-buyer tax to 20% (from 15%)
These changes will also have far-reaching impacts on the Canadian home-financing and mortgage industry. The new mortgage rules will already have made it more challenging for new homebuyers across Canada to finance their home-ownership dreams. According to Toronto-based real estate marketing, promotion and sale website Urbaneer, one simple way to look at the impact of these changes is as follows:
Prior to the changes, the maximum someone could qualify for is about 7x income. After the changes take effect, that’ll go down to 5x income.
However, in the next few years, it’s not just new homebuyers that could be impacted. As maturing mortgages come up for renewal, some existing homeowners might not qualify for such renewals – thanks to the newly adopted stress-test requirements. As a result, more Canadians are likely to ditch their existing lenders in search for a better deal elsewhere.
So, what will this do to the Canadian home financing industry? Well, according to some preliminary feedback, this development could change the lending landscape and tilt it in favour of un-regulated (or less regulated) lenders, such as private lenders and Credit unions. If this trend continues, mortgage brokers in greater numbers will start directing more of their clients, those who will presumably fail the stress test, towards these alternate lenders.
The Future of Demand and Supply
So, given all of this activity around our housing market, what impact on home prices should homebuyers and Realtors expect in the coming months?
According to Romana King, former senior Editor at MoneySense, and licensed realtor and Director of content at Zolo.ca, we can sum it all up in a single word: Volatility! According to Ms. King, depending on where you live in Canada (Province), you should expect real estate prices to range from going lower, to staying pretty much stable over the course of the year, or even ticking up a couple of notches.
Ms. King believes that both buyers and sellers will help shape tomorrows housing market. With an increase in mortgage rates, and the enhanced mortgage qualification rules in place, buyers are struggling to finance new home purchases. Potential buyers will therefore need to reset their future homeownership expectations. As a result, there will likely be greater competition amongst a whole lot of buyers to bid for smaller, more affordable homes.
In the coming months and years, the new housing market paradigm will also have an impact on home sellers. With a limited number of homebuyers able to afford any asking price, sellers will need to taper their expectations around what they might expect to sell their homes for. Additionally, it’s unlikely that homes for sale will fly off the shelves like they used to prior to the new reality setting in.
Having said that however, Ms. King believes that, based on published statistics of housing inventory, real estate markets across Canada are, on the whole,
“…cooling off and returning to a more balanced market where supply meets demand.”.
And, based on Canadian Real Estate Association (CREA) predictions, Canada’s national home price, which stood at $503,400 in 2017, is likely to drop by roughly 1.4% in 2018. Should that transpire, it will be the first such nationwide decline since 2008.
Future Price to Pay
Longer-term home price forecasts are all over the map! The Royal Bank of Canada (RBC) projects that 2018 will likely not be a stellar year for home price increases. The Bank seen a marginal 2.2% jump in forecasted home pricing.
However, other sources (including Royal LePage) see a more modest 4.9% jump in home prices next year. There are yet other longer-term price appreciation forecasts, including published by the Huffington Post, that seem to indicate home prices will continue to trend upward over the next decade or so in some Canada’s hottest housing markets.
While many analysts predict that, following their extra ordinary upward trajectory in the last few months, home price are likely to remain flat for the foreseeable future – not everyone agrees with that thesis. Stephen Punwasi co-founder and self-confessed “data nerd” at Better Dwelling, a leading Canadian independent housing news outlet, disagrees.
Through an elaborate dissection of multi-year data from various sources, Punwasi’s forecast model indicates that based on historical data trends “…a four year drop in prices on the horizon”, and that “…we would see prices stop dropping in 2021”. In fact, according to one Better Dwelling model, “Canadian real estate prices will fall 28% by 2020”. And that’s in the not too distant future!
Demographic Shifts
The future of Canadas housing market is also likely to be impacted by impending demographic changes to Canada’s population. With the focus of housing activity shifting from baby-boomer parents, and onto their millennial children, this next generation of Canadians has sufficient critical mass (in terms of numbers of potential homebuyers) to change what the housing landscape across the country will look like for years to come.
One of Canadas leading real estate companies, Royal LePage, believes that the country’s demographic trends will likely give some longer-term impetus to the housing market. Based on predictions from Statistics Canada, which show the number of millennials set to grow by 17% (reaching approximately 3 million plus) and the results of a survey commissioned by the company, it would seem that the demand to form new households in the coming years is likely to rise significantly.
It is this trend that has prompted the company’s CEO, Phil Soper, to conclude:
“Whether they choose to buy or rent, peak millennials will inevitably shape the housing market due to their sheer volume”.
Soper sees a huge pent-up demand coming from this demography, with a significant number of millennials eager to become homeowners. Still, the Realtor believes that, even though homeownership is deeply desired, millennials have significant obstacles before them.
Affordability Challenges Ahead
Home affordability is likely to be a huge challenge amongst Canadas future homebuyers. The Royal LePage survey presents a glass half-full, half-empty scenario. 69% of those surveyed would like to see themselves as homeowners over the next 5-years, yet only 57% of them are convinced that they’ll be able to afford a home.
The survey also gives us another unique insight into what the Canadian housing landscape might look like in years to come. A full 61% of respondents from across the country indicated a strong preference for owning detached homes, yet only 36% of that population believed that they might be able to find something within that segment. So, if surveys are any indication of trends – could builders bring more detached homes onto the market to tap this pent-up demand?
Another interesting shift that might occur, in our housing landscape, pertains to homeowner migration. With urban real estate becoming increasingly costly, and out of reach of future homeowners, the trend is for Canadian buyers to shift further into the suburbs to find a home. Nearly 52% of those surveyed by Royal LePage confirmed that they would embrace the suburbs in order to find and buy larger units for their planned families. It is therefore likely that homebuilders could take that as a cue to start developing more residential properties across Canada’s suburbs.
And yet again, staying true to the migration theme, the density of Canadas housing might drastically shift from the major metropolitan areas of today, like Toronto and Vancouver, to cities further afield. This trend was also confirmed in the survey, with 61% of the respondents indicating they’d be willing to relocate to a different city to find affordable housing. Canadians may therefore see more homebuilding activity in places like Hamilton and London (alternates to Toronto in Ontario), and Victoria and Kelowna (alternates to Vancouver in BC).
Many of these affordability challenges are validated by an October 2017 study conducted by the Canada Mortgage and Housing Corporation (CMHC). For instance, writing on the results of the study, Montreal-based Steve Huebl, a journalist for Canadian Mortgage Trends, a Canadian resource for mortgage information, notes that 43% of first-time homebuyers could delay home purchases if they can’t find their ideal home, while 39% of existing owners could consider alternative locations to get that ideal home.
So, what does this mean for the Canadian housing market in the long-term? It is likely that instead of seeing dense populations of housing, like we see in Toronto and Vancouver, we’ll see more homes spread out across the rest of the country. Additionally, it is likely that homeownership numbers will decline or stay flat, until prospective buyers are confident they can afford the purchase.
The Rental Scene
These affordability challenges will likely drive more future Canadian home seekers to rent, instead of considering ownership. According to Lucy Mazzuco’s blog on Now Toronto, a weekly news and entertainment voice, renting has been for long stigmatized as not a desired living option. However, with no guarantees that home prices will appreciate, and with ever increasing property tax charges and property maintenance costs, the wisdom of homeownership and affordability is now being questioned.
For instance, in Toronto’s real estate market, renting may make better sense than buying. In particular, Muzzuco points out, “…those moving out on their own for the first time, see renting as investing in an experience”. And veteran journalist and personal finance writer Rob Carrick of the Globe and Mail tends to agree!
According to Carrick: “Buying a home is not the answer to insanely expensive rent”. That’s because, even when historically high rents are factored in (as is the case these days), rental units are often more affordable to a particular segment of the population. So, as younger Canadians bide their time, saving to buy their own homes, it may be that more of them will likely rent for the next few years. This trend may drive more landlords to make the availability of long-term rental units a priority in the coming years.
Canadian Housing – The State of The Union
So, what exactly is the state of the Canadian housing market? Are we in a bubble, or is this just another passing phase that we are going through? Based on all of the research thus far, Canada is far from a housing bubble – at least not like the kind that precipitated the 2008-09 financial crises in the U.S. On the whole, housing looks slightly overvalued in all major population centers across Canada, but various “cooling measures” introduced by Federal and Provincial governments seems to be having the desired effect.
Having said that though, buyers, sellers, Realtors and Mortgage specialists are less concerned about a “housing crises”, and more worried about the personal debt situation of Canadians. Indirectly, if Canadians aren’t able to get a grip on their personal finances, it could have a ripple effect on the broader economy – including the housing market.
