Pol­icy de­ci­sions and in­ter­est rate path will de­ter­mine if real es­tate re­bounds


As real es­tate mar­ket stats pour in from across Canada, it is be­com­ing abun­dantly clear that prop­erty mar­kets in 2018 have lost the mo­men­tum of re­cent years.

House­holds, govern­ments and in­dus­try watch­ers alike are con­cerned about the di­rec­tion real es­tate mar­kets have taken. Even though sales and, in some places, prices are lower than be­fore, hous­ing af­ford­abil­ity has not nec­es­sar­ily im­proved.

Many won­der if it is the right time to buy or sell. Oth­ers won­der whether real es­tate mar­kets are go­ing to de­cline even fur­ther, or if the mar­kets will turn around in 2019.

The an­swer to these ques­tions is: It de­pends. It de­pends upon in­ter­est rates, job growth, wage in­creases, de­mand for hous­ing, govern­ment in­ter­ven­tions and more. While one can spec­u­late about the fu­ture, it is al­ways ben­e­fi­cial to first un­der­stand what has tran­spired in the past.

The greater Toronto hous­ing mar­ket, the largest in Canada, has recorded fewer sales in 2018 than it did in any year in the past ten years. In fact, the last time Toronto’s real es­tate mar­ket recorded fewer than 80,000 sales was in 2008.

That year was ex­cep­tional for two rea­sons. First, the Cana­dian econ­omy was show­ing signs of weak­ness as it and most oth­ers around the world en­tered into the Great Re­ces­sion. Sec­ond, the City of Toronto im­posed a new land trans­fer tax that made some buy­ers ad­vance their home pur­chases to 2007, re­sult­ing in fewer sales in 2008.

But even in 2008, nom­i­nal hous­ing prices did not fall rel­a­tive to 2007. That means 2018 is unique be­cause the av­er­age nom­i­nal hous­ing price ac­tu­ally de­clined by 4.3 per cent.

Van­cou­ver’s hous­ing mar­ket, in which 24,619 sales were recorded in 2018, was no bet­ter. The Real Es­tate Board of Greater Van­cou­ver noted that sales in 2018 hit “the low­est an­nual to­tal in the re­gion since 2000.” The com­pos­ite bench­mark price in De­cem­ber 2018 de­clined by 2.7 per cent from a year ear­lier.

De­spite de­clin­ing prices, many be­lieve that hous­ing af­ford­abil­ity is un­likely to im­prove. A re­cent re­port by the Royal Bank of Canada (RBC) ob­served that home­own­er­ship costs rel­a­tive to me­dian in­comes will con­tinue to rise in Canada. The RBC re­port said that by the end of 2019, “own­ing a home will take up 79 per cent of the me­dian house­hold in­come” in Toronto.

In Van­cou­ver, home­own­er­ship costs claim 88 per cent of the me­dian house­hold in­come. RBC ex­pects home­own­er­ship costs to rise in Cal­gary, Ed­mon­ton, Ot­tawa and Mon­treal.

The high lev­els of house­hold debt in ex­pen­sive hous­ing mar­kets is an­other source of con­cern. The Cana­dian Mort­gage and Hous­ing Cor­po­ra­tion (CMHC) re­ported that the debt-to-in­come ra­tio was 208 per cent for the res­i­dents of Toronto. For Van­cou­verites, it was even worse at 242 per cent.

Most of the house­hold debt com­prise mort­gage debt, which is sen­si­tive to changes in in­ter­est rates. The Bank of Canada has raised in­ter­est rates mul­ti­ple times in the past few years. The Bank’s de­ci­sion to­day not to raise rates any fur­ther sug­gests that the Bank is mind­ful of the slow­down in the global econ­omy that has been wors­ened by the trade tus­sle be­tween the U.S. and China.

While the con­sen­sus is lack­ing about the fu­ture of in­ter­est rates in Canada, many be­lieve that the fun­da­men­tals are miss­ing to jus­tify sig­nif­i­cant in­ter­est hikes in Canada in 2019. This will be good news for home­own­er­ship.

Hous­ing mar­kets have with­stood a se­ries of pol­icy in­ter­ven­tions by pro­vin­cial and fed­eral govern­ments that in­clude ad­di­tional trans­ac­tional taxes on for­eign home­buy­ers, strin­gent mort­gage reg­u­la­tions, stress tests, ris­ing in­ter­est rates and more. The slow­down in hous­ing mar­kets, one must re­al­ize, is the ex­pected and in­tended re­sponse to a se­ries of reg­u­la­tory changes and hence must not be viewed solely as a sign of mar­ket weak­ness.

At the same time, one should also con­sider a long-term view of the prop­erty mar­kets. Hous­ing is a durable good that pro­vides shel­ter and other ameni­ties while grow­ing in value as an as­set class. The av­er­age home price in greater Van­cou­ver and Toronto is up 100 per cent over 10 years.

The in­crease in av­er­age hous­ing prices over the long run should, there­fore, pro­vide per­spec­tive to those who own or are con­sid­er­ing buy­ing a house.


Many won­der if it is the right time to buy or sell. Oth­ers won­der whether real es­tate mar­kets are go­ing to de­cline even fur­ther, or if the mar­kets will turn around in 2019.

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