Canada’s housing crash—long anticipated by many an astute mind—unceremoniously fizzled and died last year. Many professionals predicted that Canada’s housing market would crash in 2018 but the Canada housing bubble still remains with some market corrections. Here are some professional predictions on whether or not Canada’s housing market crash is really coming in 2018.
It happened in mid-August when most Big Bank analysts started to comment on the housing bubble that was no more. Up until that point, most of Canada’s real estate market had rapidly accelerated, often defying the expectations—and desires—of smart money-minded people.
Why comment on the demise of Canada’s housing market crash that never was? Because for the fourth consecutive month, ending in July 2017, analysts saw moderate corrections in prices and activity.
One of the biggest factors in the 2017 soft-landing of Canada’s real estate market were the policy changes implemented by the Ontario government in the spring of 2017. These changes—which included a foreign buyers’ tax, a vacancy tax, additional property tax transfer tiers (which added to the cost of purchasing higher priced homes), as well as changes to rent control—helped moderate the actions of Ontario buyers. It also prompted a 44% (seasonally adjusted) decline in the number of transactions between March and August 2017—not far off the 48% plunge that was experienced between December 2007 and December 2008 (a response to the U.S. housing crash and credit crunch).
If that wasn’t enough, the Federal Government really hammered a nail into the real estate bubble coffin by announcing the new mortgage stress test, which would close all loopholes and require every new borrower, or anyone renewing or refinancing with a new lender, to qualify for posted mortgage rates, rather than discounted rates. This change, which came into effect on Jan. 1, 2018, effectively cut the maximum amount a person could borrow by as much as 25%.
The question, then, is whether or not Canada’s housing market will crash in 2018? Here’s what the banks have to say about Canada’s housing market crash:
Moderate price corrections in 2018
There will be two main factors that will dictate how Canada’s real estate markets will do in 2018, explains Marc Pinsonneault, senior economist at the National Bank. Not surprisingly, these two factors are the new mortgage stress test (known as B20) and the anticipated increase in interest rates.
“As a result, we think sales will dip lower in 2018, by about 10%,” says Pinsonneault, “and this will translate into a drop in prices, particularly in major urban centres, like Toronto and Vancouver.”
Overall, Pinsonneault and his team expect a 2.8% drop in prices for residential real estate in Canada, with a more pronounced impact in Toronto and Vancouver, where they expect a 5% dip in prices for 2018.
“A 2% to 5% drop in prices is very moderate, so we don’t expect disasters,” says Pinsonneault. As such, the National Bank predicts a balanced market for Canada’s housing market in 2018, with only moderate price corrections.
A return of the historical price increases
Last year was a busy one for analysts involved with tracking and monitoring Canada’s real estate market trends. The year started sluggishly in the west, as the Greater Vancouver Area slowly shrugged off the impact its new foreign buyers’ tax (introduced in August 2016). Finally, after additional regulatory changes in Ontario and a couple of minor interest rate hikes by the Bank of Canada, the year ended with a flurry of activity. Still, none of this was surprising to the team of economists at RBC when predicting Canada’s housing market crash.
In the December Econoscope, RBC’s Chief Economist Craig Wright states: “The drivers of Canada’s economy are set to shift in 2018.” Wright and his colleagues predict a slowdown in the nation’s housing activity, but “the risk of a full-blown housing market crash occurring in 2018 is low in our opinion.”
Wright states, that the majority of housing markets in Canada are in balanced territory, “and expect to remain so in 2018.”
After years of relying on heavy consumer spending and robust housing activity to help grow the economy, Canada is finally starting to rely on other economic factors, including labour market growth, government infrastructure spending, solid global trade prospects as well as growing business investment in 2018.
These fundamental changes combined with a moderating real estate market prompted RBC Senior Economist, Robert Hogue, to state that the overall Canadian real estate market is in a relatively strong position going into 2018. “We see limited downside risks to prices in the near term in Canada because the majority of markets—including Toronto—are in balance,” he explains.
But this optimism doesn’t mean there won’t be further moderations to the overall market. RBC analysts expect market activity to be more volatile than usual as buyers and sellers strategize over the impact of the new mortgage rules. “When the dust settles, which could be as late as the spring, we believe that the combination of tighter mortgage rules, rising interest rates and poor affordability in several key markets will weigh on homebuyer demand in Canada,” states Hogue in his December economic analysis.
As a result, RBC analysts predict that home resale activity will decline by 4.2% in 2018. This follows a 4.8% drop in 2017. (The final results for 2017 won’t be released until the first or second week of January, so this is a forecasted drop that could change based on final numbers.)
How will these predicted resale activity dips impact home prices? It will mean price acceleration will grind to a halt from a double-digit rise in 2017—when prices accelerated by 11.1%, on average, across Canada—to a more normal appreciation of 2.2% in 2018, nationwide.
It will be a tame year for Canada’s real estate markets
Economists at BMO are expecting a significantly slower real estate market in 2018, primarily because of fall-out from a slew of new regulatory policies introduced in 2016 and 2017, combined with the threat of rising interest rates.
Yet, despite all the downward pressure on potential buying activity, economists at BMO, along with analysts from all big banks, are predicting housing prices to grow marginally in most provinces in 2018.
“The adjustment in the Toronto market is ongoing,” stated BMO Capital Markets economist Robert Kavcic in his December econoFACTS report, “but strong underlying supply-demand fundamentals should prove supportive next year, once the remaining forth gets worked off.”
Kavcic is confident that the “froth” of Toronto’s market—that saw prices jump to new historical highs in 2017—won’t return in 2018, primarily because of anticipated interest rate hikes and the prolonged impact of OSFI’s new mortgage stress test.
“To put it in perspective, we are now looking for a 7% to 10% drop in housing starts next year,” states Kavcic. He adds there will be a 1% to 5% reduction in the number of existing sales, which will create a slowdown in sale prices meaning prices will either flatline or increase by more historically normal increments (between 0% and 4%)—compare this to the 14% nationwide price index increase in 2017.
Immigration will help ease larger markets
Adrienne Warren, senior economist with Scotiabank, is confident that national price trends will remain positive going into 2018, although, with more than half of local real estate markets in balanced territory, she describes this year’s housing market as “subdued.”
Warren attributes the overall moderation in Canada’s housing market crash to a combination of tighter mortgage qualifying rules (B20) and the incremental increases in interest rates. However, she points out that “High-priced markets, including Vancouver and Toronto, with strained affordability and a large share of uninsured mortgages, may have more downside risk.”
But these big urban centres have “strong demand fundamentals, including low unemployment, strengthening wage gains, and ageing millennials,” which will prevent an outright collapse in their increasingly-strained housing markets. However, potentially the most significant force in Canada’s housing market, according to Warren, is immigration. “The majority of immigrants to Canada settle in the largest [cities].” Of the 1.2 million immigrants that came to Canada between 2011 and 2016, 56% lived in the three largest urban centres: Toronto, Montreal and Vancouver.
“These cities are expected to continue to attract the largest number of new immigrants for the foreseeable future,” writes Warren. She adds, “immigration has been a significant contributor to the strength and duration of Canada’s almost two-decade-long housing cycle upswing.”
Soft-landing (and some vindication)…finally
A couple of years ago, TD Bank economists promised a soft-landing for Canada’s housing market. Their predictions came at a time when many international reports were announcing potential doomsday scenarios for the nation’s real estate markets. Almost five years later, those same economists are on the verge of vindication.
According to Michael Dolega, Director and senior economist at TD, Canadians got a “good dose of news” when the sales activity numbers came in at the end of 2017. Dolega and his colleague, Rishi Sondhi, write: “Overall, we anticipate a continuation of the soft-landing narrative that has so far characterized dynamics in Canada’s housing market.”
While Dolega and Sondhi concede that higher mortgage rates will certainly dampen real estate activity in 2018, they are confident that current employment expectations and income growth will “cushion the blow.”
Mortgage resets in 2018 won’t trigger a sub-prime collapse
Finally, the economists at CIBC had a lot to say about Canada’s housing market. What was particularly interesting was CIBC Senior Economist, Avery Shenfeld’s position on fears regarding consumer debt.
Bank of Canada Governor, Stephen Poloz, has repeatedly warned consumers about the potentially damaging impact of high household debt. The fear is that a large correction in the housing market or a moderate increase in interest rates could prompt significant numbers of defaults, which could harm the country’s overall economy.
CIBC Senior Economist, Avery Shenfeld, concedes that Poloz’s fear is real. Still, Shenfeld is confident that even if defaults in Canada spike, the impact will be nothing close to the subprime mortgage crisis that sparked America’s 2008 financial crisis. “That burden is much better distributed [in Canada] than was the case in [America],” states Shenfeld in his December CIBC Economics report. “The data shows that the bulk of the mortgages are either insured or well backed by home equity and that Canadians are having no difficulty meeting their monthly payments at current levels for interest rates and employment.”
However, there is always the potential of an external factor—just as David Madani, economist of Capital Economics, suggested mere months before oil sector prices plummeted in 2014. Shenfeld acknowledges this and states that the real risk to Canada’s housing market crash is “either rates rise too quickly for Canadians to cope, or that employment takes a nosedive.”