The economic engines and powerhouses in Canada – Toronto and Vancouver – keep moving ahead and growing stronger. But what will happen to the Canadian real estate market in 2017? Will it expand? Will the bubble burst?
Bubbles are generally considered to occur when the price of a financial asset rises to well above historic norms or its intrinsic value or both. Under these conditions, investors buy at inflated prices not for the fundamental value of the asset but merely to resell to the next investor at a higher price.
The term bubble entered official use with the British Parliament’s passage of the Bubble Act in 1720. England had given the South Sea Company the right to take over its war debt in exchange for exclusive trading rights in the silver and gold rich South American colonies. Investors quickly inflated the share prices of the company, an action that the Bubble Act sought to prevent. The artificially high share prices collapsed in the fall of 1720, dropping from 775 to 290 British pounds.
About 200 years later the Great Depression began in the United States shortly after the stock market crash of October 1929 and wiped out millions of investors. It lasted until the late 1930s making it the longest and deepest depression of the 20th Century
About 80 years later the 2008 financial crisis took its toll. Years prior saw irresponsible mortgage lending in the US when loans were given out to subprime borrowers with poor credit histories who struggled to pay them. Financial engineers at the big banks put large numbers of them into pools of supposedly low risk securities. The rating agencies who were paid by the banks gave them triple-A credit ratings. American suffered a housing slump in 2006 and it started a chain reaction and the mortgage-backed securities slumped in value and the highly rated supposedly low risk investments crashed.
So what will happen to housing and the Canadian Real Estate market in 2017? According to the Canadian Real Estate Association (CREA), national sales are forecast to drop in 2017 by 3.3%, compared to the previous year.
Bucking this trend, however, are B.C. and Ontario where transactions are expected to remain strong. They will fall short of 2016 record levels due to an ongoing shortage of affordably priced listings for single family homes, tightened mortgage regulations, and deteriorating affordability.
Toronto and Ontario
Despite a predicted decline in sales activity for 2017, most of Ontario’s housing markets won’t experience price declines this year. This is particularly true for homes located in the Greater Toronto Area and in the larger Ontario region known as the Golden Horseshoe. This is due, primarily, to a pronounced lack of supply of housing stock, particularly for low-density, single-family detached homes. This seller’s market will persist. This lack of supply had an impact on housing prices. In 2016, the average selling price of a GTA home rose to $730,472—up 20% on a year-over-year basis.
As a result, anyone in the market to sell a home in the GTA or in the surrounding areas, including Niagara, Hamilton, Halton, Peel, York and Durham, can continue to expect strong demand. This should translate into higher sale prices and fewer days on the market.
Vancouver and British Columbia
CREA expects that the largest regional drop in both sales activity and prices will be in British Columbia. Given how 2016 played out, with significant drops in both the number of transactions and sale prices, CREA anticipates double-digit drop in transactions (12.2%) in 2017, which translates into an average price drop of 7.8% in 2017. However, CREA adds that this largely reflects an anticipated decline in single family home sales activity at the higher end of the market—particularly in the Lower Mainland.
Smaller markets like the Comox Valley on Vancouver Island are experiencing a significant drop in new listings but sale prices are up and increasing because there are so few listings and the demand is higher than the supply.
The Rest of Canada
An ample supply of listings relative to demand is anticipated to keep price gains in check in other provinces, although sales have begun to draw down inventories in provinces where supply had been elevated in recent years.
The biggest factor in the predicted 2017 slowdown are the tighter mortgage regulations that were introduced in 2016. Tightened regulations are expected to reduce the number of first-time buyers who qualify for mortgage financing, particularly in pricier markets, where there is a severe shortage of lower-priced listings. Another factor is that mortgage rates are expected to rise in 2017. This will also reduce the number of home buyers in the Canadian marketplace.
A Toronto and Vancouver Bubble?
Those expecting a housing price bubble burst are probably only anticipating price collapses in Toronto and Vancouver. Why? Because if you were to strip out Toronto and Vancouver from the Canadian real estate market, the average price of a home drops from $489,590 to $361,000. With a national median household income of just under $79,000 (according to Statistics Canada) average house prices are 4.6 times family incomes—a little higher than the average over the last 40 years, which is closer to 3.5 times income. As well, Canadian homeowners have the benefit of historically low 2% to 3% mortgage rates.
Impact on net worth of Canada’s homeowner
For those already in the marketplace, the real threat is whether or not changing conditions will result in price declines and whether or not that will erode overall household net worth.
A report in December 2016 by DBRS, a Canadian-based privately held, credit ratings agency, suggested that rising home values pushed Canadians to a record level of net worth, relative to their disposable income. But, here’s the interesting part: DBRS believes that even if the Canadian housing market did crash, current homeowners could easily weather the storm. However, would this confidence remain if interest rates rose significantly?
According to DBRS, the average Canadian household had a net worth of $726,000—including 74% of home equity, thanks to a decade of steady property appreciation (DBRS numbers were based on data up to Sept. 30, 2016). Where are all these wealthy Canadians? Are the numbers skewed by high income earners?
Homeowners Check your mortgage
As a homeowner, you need to make sure you’re well positioned to weather the uncertainty of the next few years. If you have stable household income, 2017 will probably let you ride out continued low variable-mortgage rates. However, if you’re in the market to renew, consider locking in. With mortgage rates poised to rise, this might be the year to tackle your biggest debt.
Impact on home buyers
The biggest factor in the predicted 2017 slowdown are the tighter mortgage regulations that were introduced in 2016. Another possible factor is the potential for mortgage rates to rise in 2017. While the increase is expected to be slow to moderate, this increase will also reduce the number of home buyers in the Canadian marketplace.
Historically, the spring market is the busiest house buying season. A spring rush, combined with continued low inventory, could push prices up. However, they may be fewer buyers able to buy. According to Genworth Canada, the largest private mortgage insurance provider, approximately one-third of first-time homebuyers would no longer qualify for their current homes if they were forced to re-qualify under these new mortgage rules.
Impact on home sellers
The mortgage regulation changes could mean less demand in the housing market. In most markets in Canada, sellers may have to adjust to a slower market where multiple offers are no longer the norm. That means expecting your home to stay on the market for a little longer as buyers take time to shop around.
In markets where the number of new listings is down significantly, these markets will still experience price increases although the total number of sales will be down overall. Sellers will still see multiple offers in these areas such as Vancouver Island and well-priced good value homes should sell quickly.
People selling a single family detached, semi-detached or row home in the Greater Toronto, Vancouver, Victoria or Montreal areas, don’t need to worry. Even if prices drop 10% or 15%, many of these homeowners are sitting on substantial equity based on the substantial price increases of prior years.
Real Estate Investing
Despite all the advice about not buying a residential property for income purposes, many still do. Rental markets are still tight in the hottest real estate markets, with vacancy rates still hovering in the mid-1% range. In the Comox Valley on Vancouver Island the vacancy rate sits at 0.5%. Buying a residential investment property in areas like this makes sense.
For the best value, consider multi-unit rental properties—like duplexes, triplexes, and beyond. This type of rental stock is still far more favourable than single-unit rentals, such as condos, as you can spread out the risk of rental loss across multiple units.
Markets that are located near university or hospital hubs but away from larger city centres offer steady tenant inventory. Abbotsford, Port Moody and Langley, in B.C. are good options as is the Comox Valley.
Toronto and Vancouver will continue to face pressure from their run up in prices in recent years. Expect both markets to cool slightly in sales and prices due to mortgage regulation changes and mortgage rate increases. But the biggest unknown will be the number of new listings. If they drop faster than the decreased demand, prices may rise once again.
Smaller market areas like the Comox Valley on Vancouver Island will see price increases as long as demand remains and listings drop in numbers.