Some predictions for the 2020 housing market

We have seen many challenges in the housing market over the past few years. Housing prices have been up and down; housing sales were down but have rallied in many areas of the country in the last half of 2019. The government also introduced the First Time Home Buyer Incentive. Yet, affordability continues to be a hot topic across Canada.

Interest rates inched up slightly for variable rates and lines of credit but on Wednesday, Dec 4, the Bank of Canada left the Prime lending rate at 1.75%.  Growth in Canada did slow in the third quarter of 2019, yet consumer spending expanded moderately, supported by stronger wage growth. Housing investment remained strong throughout the year.

We’ve also seen a slight increase to fixed-rates due to the upward pressure on bond yields and increases to the cost of funds. Still, rates are relatively low – perhaps this is the new normal.  

According to a recent report from RE/MAX, an increase in consumer confidence could be a key factor affecting the housing market in 2020. 

The report found that Canadians have adjusted to the mortgage stress test, which was introduced three years ago, and only two-in-ten Canadians say that the mortgage stress test negatively affected their ability to purchase a home in 2019. 

The report also found and that older millennials are now moving into their peak earning years and will drive the market in 2020. RE/MAX found that more than half (51%) of Canadians are considering buying a property in the next five years, especially those under the age of 45. This is up from 36% at the same time last year.

Here’s a cross-Canada snapshot:

British Columbia

Consumer confidence in early 2019 was shaky -- the number of sales declined by 7% cent. However, confidence is returning and most regions are experiencing a balanced market. The prediction is that BC will continue to strengthen through 2021 and become a powerhouse once again.

Prairies

Alberta’s economy was still sluggish over the year and the unemployment rate is relatively high; however, Calgary is seeing some signs of life as its population grows. According to a national housing market outlook published by the Canada Mortgage and Housing Corp. (CMHC), Calgary is expected to see a return to market growth over the next two years, supported by an increase in the city’s population. This may fuel an increase in housing starts in 2020 and 2021.

In Winnipeg, residential sales were up by 5% over last year. Regina experienced the same increase. Construction starts and house sales are both expected to improve in Saskatchewan in 2020. CMHC predicts that anywhere between 700 to 1,400 new homes will be built in Regina next year and 1,300 to 2,000 new homes built in Saskatoon.

The markets in the Prairies are a mix of buyer's and balanced markets and are expected to stay the course going into 2020.

Ontario

Toronto and the GTA are poised for a strong housing market in 2020. Most other cities in the province are expected to show strong growth as well, especially Ottawa and Windsor, and it’s predicted sales may rise by about 7%. Overall, it’s a seller’s market.

Quebec

The Quebec housing market is on fire. The market is getting a boost by low interest rates and a vibrant Quebec economy, which supports wage increases and buying power. The challenge is a shortage of inventory, which may be the reason the market is expected to remain strong into 2021. Single-family homes are outshining other types of properties.

Atlantic Canada

Affordability is making this region is attractive to homebuyers, and they’re buying detached, single-family. The region's growing condominium market is being driven by retirees.  Increased consumer confidence is expected to stabilize the region. Halifax and Saint John have seen solid price growth of 6% and 5%, respectively.  Most markets are balanced.

The  Market Overall

The housing market has turned around slightly in the last half of 2019. A Reuters’ poll found that a strong domestic economy, rising immigration and lower mortgage rates have helped the housing market make a comeback in the second half of this year. "It is not just low interest rates that are helping the housing market – the fundamental support is demographic and that is largely from a rapidly growing population driven by international migration," Sal Guatieri, senior economist at BMO said in an interview with Reuters.

What will 2020 bring?

The Canadian Real Estate Association’s (CREA) prediction for 2020 is that housing sales will continue to improve through 2020, albeit slowly. National home sales are forecast to rise by 7.5% to 518,100 units next year. Ontario and Quebec are predicted to see sales rise by about 7% in 2020, while activity in Alberta will recover by about 5% compared to 2019. The number of homes trading hands in other provinces is predicted to edge up or down only marginally.

With all the positives going into 2020, if you’re thinking of buying a new home, renewing a mortgage or refinancing an existing mortgage, or just want an update about your local market, reach out to your TMG mortgage agent.

The Canadian economy and the housing market

We are living in strange times, economically speaking. Mortgage stress tests have slowed the housing market and may be one of the reasons the Bank of Canada has signaled it may pause on increasing interest rates. 

Home sales fell sharply in Canada last year -- the largest annual decline since 2008, spurring predictions the country could face stagnant sales in 2019.  The decline was due in large part to slowing activity in British Columbia and in the Greater Toronto Area, both hit hard by new government measures and higher interest rates.

The Canadian Real Estate Association has forecast little improvement in 2019, predicting 0.5% growth in national sales this year, over 2018.

Christopher Alexander, regional director for Re/Max in Ontario and Atlantic Canada, said the mortgage stress test has been the biggest factor keeping buyers out of the market, especially in Vancouver and Toronto.

 “It’s a lot harder to get a mortgage now than it has been for the last 10 years,” he said. “Not only do you have the stress test, but the big banks are very particular in their criteria. It just seems that everybody is being very cautious.”

However, there are variations across the country. The average price of all homes sold in the Greater Toronto Area fell 3.4% in 2018, for example, while the average price climbed 3.7% in Ottawa and 5.8% in Montreal.

Bank of Montreal economist Robert Kavcic predicts little change in national sales totals or prices in 2019. He suggested the the housing market is going into a period of stagnation.

A Bigger Picture

Recently Statistics Canada released its third-quarter report on national wealth, which is the “value of non-financial assets in the Canadian economy.” Total national wealth hit $11.415 trillion in the third quarter, and at $8.752 trillion, real estate made up a 76% share of that figure. That was the highest that both figures had been, going back to the second quarter of 2007.

Data from both Canada and the US shows that real estate as a share of U.S. national wealth in 2007 was 75.3%, compared to 67.6% in Canada. That started to change with the 2008 recession when US real estate as a share of national wealth started to decline while in Canada real estate wealth started to grow.

BMO has estimated that Canadian benchmark home prices will grow by less than one per cent next year and two per cent in 2020, dragged by “tougher mortgage rules and higher interest rates so the share should continue to trend modestly lower.”

Economists have mixed feeling about this trend. Some say a flat housing market is not anything to worry about. Others, like CIBC’s Benjamin Tal said the Canadian housing market is more important to the overall economy than at any other time on record. Aalthough the Bank of Canada (BoC) argues that the worst is now behind us, and that housing markets are stabilizing, some economists find it difficult to agree.

The BoC’s workhorse model says that six quarters can pass before a rate hike can be felt in the economy but according to Tal and others, only five quarters have passed since the first move of this cycle and “we’re already seeing a slowdown in housing-related indicators.” 

The Global Economy

There are growing fears about a worldwide economic slowdown.  Uncertainty with tariffs, ongoing trade wars, and even the US government shutdown (over for now) is all having a negative impact on the global economy as a whole. 

The International Monetary Fund (IMF) downgraded its expectations for the global economy, highlighting sharp declines in Europe and warning that the risks of a major slowdown have increased.

Already, at the annual World Economic Forum being held in Davos, Switzerland, there is worry about the global economy. Absent from the Forum is representation from the US. French President Emanuel Macron stayed home to deal with ongoing domestic issues. British Prime Minister Theresa May is home, desperately trying to eke out a bipartisan deal for Brexit.

In the United States, the shutdown has cut into growth. Early this month, consumer confidence slumped to the lowest level of Trump’s presidency, according to the University of Michigan’s consumer sentiment survey.

While few see a recession as imminent, the number of risks is growing. As an economy slows, it’s easier for it to be knocked off track, many economists say.

 “After two years of solid expansion, the world economy is growing more slowly than expected and risks are rising,” said Christine Lagarde, managing director of the International Monetary Fund in an interview in the Globe & Mail. “Does that mean a global recession is around the corner? No. But the risk of a sharper decline in global growth has certainly increased.”

Chief executives ranked a global recession as their No. 1 concern for 2019, according to a survey of nearly 800 top business leaders around the world. 

A survey of 1,300 chief executives released by PwC found that 30%  of business leaders believe that global growth will decline in the next 12 months, a record jump in pessimism to about six times the number who said that last year.

What happens now?

The “R” word has been bandied about lately. In economics, a recession is a business cycle contraction, a general slowdown in economic activity. Economic indicators such as GDP, employment, investment spending, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. While we are living in a slowdown, we are not seeing high job losses or increases in bankruptcies.

There is also some optimism. In a blog by TMG’s David Larock, he writes that core inflation has not increased and five-year fixed rates continue to settle in at slightly lower levels. Variable rates are holding steady. 

It’s a matter of waiting this through, as Canadians did in 2008. There may be an upside-- this projected slow period means buyers can take their time searching for a house and not worry about missing out on a sale. 

As always, Canadians are a resilient bunch – this is just one more challenge they will overcome.

Diving deep into the housing market

Recently, Finance Minister Bill Morneau said he would "deep dive" into Canada's housing market to find out what’s really affecting record-high prices, arguing that if the government is going to make any changes, then it should be evidence-based. So let’s look at some of the “evidence”.

Interestingly, Morneau divides the housing market into four parts. The stable market, which is a significant portion and includes Montreal and Ottawa; the strong part, which includes the Toronto region where housing factors are moving quickly; the "very strong part", which is Vancouver and nearby areas; and the areas that are not doing so well because of the downturn in the oil industry. Then there is, of course, the foreign investment factor.

Overview of current housing market

The state of the Canadian economy has changed, and so too has the housing market. A look at the Statistics Canada website shows some interesting numbers: As of May, the unemployment rate is down; retail sales are up slightly; manufacturing sales are up slightly; and average weekly earnings are up, slightly. These are all good indicators that the economy is growing – but not as robust as it grew prior to the 2008 recession, but growing nonetheless.

In Mortgage Professionals Canada (MPC) Spring Report, Looking for Balance in the Canadian Housing and Mortgage Markets, it found that the number of adults with jobs is lower now that before the recession. So what accounts for the hot housing markets in parts of Canada? The real difference is now we have low interest rates, which have fuelled the housing market, and indeed, has kept the Canadian economy humming along for quite some time. We also have some indication that foreign investment is adding fuel, as well as a lack of supply.

If we take all the factors above and match them to the four parts of the housing market that Morneau mentioned we find the following:

• In Toronto and Vancouver there is higher population growth. The labour markets are better there and there is much lower unemployment but there are housing supply issues.
•  In the stable areas of the country there is balance in the labour market and adequate housing supply and demand.
•  In the areas impacted by the oil industry, lower rates are not effective because there are issues with unemployment. 

Because the housing market has been under-supplied for a long time (this is a major factor that has fueled prices in both Vancouver and Toronto – lack of supply for single family homes) the result has been a long period of rapid price growth, according to the MPC report. "The recent surge in sales has, once again, sparked a very high sales-to-new-listings ratio, and the rate of price growth has accelerated."

 Housing Bubble Revisited

It's inevitable that, along with reports of a hot housing market, a discussion of housing bubbles follows. But what, exactly, is a housing bubble? Well, it's characterized by property quickly becoming overvalued until it reaches a level that is unsustainable relative to income and other factors including employment. That rapid rise is quickly followed by property value decreasing to where homeowners owe more than the property is worth. What tends to follow is that homeowners, depending on their financial situation, will try to sell the property or will simply stop paying the mortgage, resulting in an influx of foreclosures in the market.

By that definition we could be in a bubble except for the other factors, namely, job numbers and earnings, both of which have risen in recent months. It's when unemployment rises, interest rates increase and house prices continue to rise that trouble follows. Certainly low mortgage interest rates have fuelled some of the increase in activity; however, the increased prices in the high-end markets are still skewing the average. Eventually, those high-end prices are expected to moderate and there are signs that it’s starting to happen.

Government Intervention

 As the Finance minister dives deep into the industry, Mortgage Professionals Canada (MPC) is cautioning the government against regulations that might "cool" the market. MPC said that another clampdown on mortgage lending rules in Canada could unnecessarily cause housing prices and demand to plummet – and even "bring consequent economic damage" to the country.

 "Now that the energy sector is no longer a major economic driver, a healthy housing sector is even more essential," Will Dunning, chief economist with Mortgage Professionals Canada, said in a statement.

 Morneau announced that Ottawa was forming a working group with provincial representatives from Ontario and B.C., as well as municipal officials from Vancouver and Toronto, to study Canada's booming housing market and would evaluate whether further steps are needed to protect borrowers and lenders to help maintain a stable housing market.

Since 2008, Canada has tightened mortgage regulations five times, shortening the length of loans and hiking minimum down payment rules.

Mortgage Professionals Canada sees no substantial evidence of a widespread increase in risk taking by borrowers or lenders for these reasons:

• Data from the Canadian Bankers Association shows a very low rate of mortgage arrears, just 0.28% or one per 354 mortgages
• Survey data continues to show that Canadians are highly motivated to pay off their mortgages as quickly as possible 
• At current very low interest rates, regular mortgage payments result in accelerated pay down of mortgage principal. At a current typical interest rate of 2.5%, 2.9% of the principal is repaid in the first year. 

 Bottom Line 

A home is a long term investment and its value will fluctuate up and down over the course of your tenure in it. The housing market right now is at a precipice – when high prices and lack of supply deter home buyers and potential home sellers wait out the market, then we’ll start to see moderating prices, as economists have been predicting for the last few years. One thing we know for sure is that low interest rates are here to stay for at least another year, which will be a boon when the market becomes more robust and affordable.