By Gregory Klump
Overall, the Canadian economy did well in 2018. The underlying fundamentals for housing are strong:
National unemployment fell to near-record lows, while immigration reached new heights.
Demographics also supported housing demand, with about half the large millennial group having turned 30 and the other half about to do so over the next few years – which is highly supportive for household formation.
Interest rates remain low (despite having risen).
In the absence of the mortgage stress-test that came into effect in 2018 (also known as B-20), these factors would likely boost home sales activity to new heights and contribute to strong price growth. However, the reality is B-20 will continue to squeeze access to mortgage financing until Canadian households meaningfully reduce their debts and further increase their income.
The Canadian Real Estate Association’s (CREA) projection for residential sales via all Canadian MLS® Systems in 2018 is less than 460,000 transactions — the lowest since 2012. After dividing Canadian MLS® home sales by population (i.e. putting sales on a per capita basis), 2018 is on track for being the lowest since 2001.
The national MLS® average home price in 2018 will be down by about 4% compared to 2017, making it the largest decline in 23 years, and the third-largest on record behind 1982 and 1995.
While home prices are falling in provinces where the supply dwarfs the demand (Alberta, Saskatchewan, and Newfoundland and Labrador), much of the decline in 2018’s national average price reflects fewer luxury home sales in the Toronto and Vancouver areas. Notwithstanding the reasons behind the annual decline in Canadian home prices, home buyer sentiment is bound to be cooled by headline news about home price declines.
The MLS® Home Price Index reveals home price trends have been sliding sideways in many markets. Ongoing home price growth in places like Montreal and Ottawa is offsetting declines in the Prairies. There have also been recent signs of home price gains in Toronto, which has offset a clear downward price trend in Vancouver (home sales there are on track for their worst year in almost two decades).
There is little to suggest 2019 will be much different. Rising interest rates will only make the stress test harder to pass. Indeed, CREA’s forecast for 2019 has both sales and prices comparable to 2018.
Unlike past policy changes, housing markets do not appear to be adjusting to this one. The boot prints from B-20 will continue to keep housing markets in check in 2019 — and beyond.
Gregory Klump is the Canadian Real Estate Association’s Chief Economist. Reprinted from crea.ca