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What to expect from Canada’s housing market in 2020

Canada's housing market 2020. Housing Market Expert Insights Green Zolo Romana King

In the last days of 2019, many observers of Canada’s real estate marketplace were more than a little relieved. The year had started on a sour note with fewer buyers, all of whom were still adjusting to the 2018 mortgage stress test, the threat of higher mortgage rates and the potential of further price and sales activity declines, particularly in the nation’s two hottest markets, Greater Toronto and Greater Vancouver.

But as the year progressed, the fears of a global recession, prompted by the continuation of U.S. and Chinese trade wars, began to fade. The result was reluctant optimism — an ever-increasing feeling that, despite what doomsayers have said for the last decade, Canada’s housing market would only experience a soft landing and a minor correction, before returning to historical norms of anaemic growth in sales activity and price growth.

Given this collective sigh of relief in the final days of 2019, the question now is what to expect in 2020 in terms of housing market trends.

The good news is that next year is looking up for Canada’s real estate market. Here’s what you can expect from Canada’s housing market in 2020.

Robust sales activity in Spring 2020 and moving forward

Canada's housing market 2020. Vancouver housing market entering into a buyers market

The extreme highs and lows that marked the last decade of housing activity are now a distant memory as we head into 2020. Instead, we can expect steady sales activity and an acceleration of housing prices through the course of the year.

The biggest drivers are the persistently low mortgage rates and the continued demand from first-time buyers (including immigrants and landed residents).

As a result, the housing market will heat up in the spring, as buyers compete for the limited housing inventory and lenders drop their mortgage rates to compete for borrowers’ business.

Last year, the best rates available on a five-year fixed-rate mortgage were between 2.7% and 3.5%. The lower the rates mean Canadian buyers can afford about 10% more on the purchase price of their home. As rates rise, this purchase price begins to fall (in order for the buyer to qualify under the federal mortgage stress tests).

Homebuyers win with great rates

For buyers, it gets better.

In the last few years, there’s been rising competition in the online mortgage space. While the entire borrowing process is far from being 100% online and automated, more and more buyers are choosing to go online to obtain pre-approval (and in some cases, pre-qualification) of a mortgage rate. As a result, many online lenders are doubling-down in their effort to attract direct-to-consumer mortgage business. Even the big banks are getting in on this activity.

Last year, the Bank of Nova Scotia started their push for online mortgage business by going against the norm and advertising their best mortgage rates online. (Typically, lenders advertise posted rates and buyers need to go through a pre-approval process to find out the best available rate.) Now, most are expecting the remaining big banks to update and relaunch better, more enhanced mortgage websites with at least a few set to offer highly competitive rates.

Going into 2020, buyers who opt to shop online for a mortgage rate can expect increased competition among lenders, which will translate into rate battles aimed at winning buyer business — and exceptionally good rates for those willing to let their fingers do the work.

Sales activity will continue to grow

While debates continue on whether or not the federally-mandated mortgage stress tests should be more dynamic — allowing those provinces and cities negatively impacted an opportunity to readjust the policy — the fact remains that most Canadians have adjusted to the mortgage stress test.

For example, in B.C., the number of housing transactions dropped precipitously after January 1, 2018, when the recent mortgage stress test (for uninsured mortgages) took effect. At its lowest, the sales activity in 2018 was almost a near match to the sales activity in 2010, just after the U.S. housing market crash.

BC what to expect housing market 2020 zolo
Central 1

But after a year of adjustment, the number of transactions started to pick up and by the end of 2019, sales activity had rebounded with no apparent reason why it should stop. This, coupled with persistent low-interest rates, an increase in immigrants looking to secure roots, and more millennials moving into better earning years, and most analysts believe that buying activity isn’t likely to drop as we move through 2020.

Lack of supply is the real problem

Most analysts now agree: While 2018 was a challenging year, this last year was a chance for the market to stabilize and regroup and all indications suggest that 2020 will continue in this vein.

The biggest problem going into this new year is lack of supply.

According to the Canadian Real Estate Association (CREA), the late 2019 turnaround in the market was driven largely new listings. Prior to the fall, limited listings set a trend for limited sales activity.

In a statement released late in 2019, CREA noted: “These trends have caused many housing markets to tighten, which has sharply lowered the national number of months of inventory.” In November 2019, this measure fell to its lowest level since mid-2007. “This is resulting in increased competition among buyers for listings and providing fertile ground for price gains.”

Supply issues are expected to continue into 2020, meaning buyers may face bidding wars for the most desirable property types and neighbourhoods, even in markets that have stabilized.

Housing still an excellent place to park your money

Despite the lack of affordability and the ever-present predictions of a real estate bubble bursting, housing continues to be a solid investment option for Canadians.

The big reason is that housing continues to offer returns that are much higher than other fixed-income investment products, such as bonds or GICs. Then, when you add in the tax-advantage of a primary residence, and, for most Canadians, purchasing property even at less-than-affordable rates, begins to make financial sense.

To illustrate, let’s use the CREA’s latest data. According to CREA, the average national house price increased by 8.4% from November 2018 to November 2019.

Based on this, if a homebuyer purchased a home in November 2018 for the national average price of $487,554; then 12 months later, that same home would be worth $528,728 — or a price increase of $41,174.

That’s astounding, particularly in an investment climate where high-interest savings accounts and locked-in guaranteed investment certificates (GICs) offer a return around 2% to 3%.

But what makes property even more attractive for the average Canadian is the tax advantage that comes with owning a principal residence.

If that buyer ended up having to sell after a year of owning and living in the home (and assuming that the buyer had no other property and that the home truly was a principal residence and not a business endeavour), then that 8.4% return on their investment would be 100% tax-free.

Now, here’s the kicker, CREA is predicting a 6.2% increase in the average national price of a home in 2020. Once again, a return that’s far superior than what other fixed-income products are offering in the current marketplace.

Of course, the actual rate of return is completely dependent on a variety of factors, such as where and what you buy. Homebuyers in Alberta, for instance, experienced an average decline in prices by 1.2%, while homebuyers in Ontario, experienced an average price increase of 9.5%.

Big markets, like Greater Vancouver, offer opportunity

What can buyers and sellers expect as we move into 2020? According to CREA, the “evidence suggests housing activity will continue to improve into 2020, with prices either continuing to rise or accelerating in many parts of Canada.”

In particular, employment in all areas outside of the Prairies and Newfoundland & Labrador remains strong, the nation’s population is expected to grow which puts increased demand on the need for housing, and the Bank of Canada is not expected to raise interest rates, at least for the first half of 2020. All of this supports CREA’s assertion that sales activity will be strong throughout Canada’s housing market in 2020.

Canada housing market 2020
CREA, November 2019

Yet, as we all know, Canada’s housing market is not a monolithic entity. It’s a highly regionalized economic factor that pulls in a variety of stakeholders. As such, each region, and indeed each city and neighbourhood, will need to consider how the 2020 market will impact them.

British Columbia and Greater Vancouver

According to a report released by B.C. credit union, Central 1, the province’s housing market is recovering much quicker than anticipated. The biggest reason is improved affordability — affordability that was created by a soft-landing market correction that seems to have stopped and stabilized towards the end of 2019.

Combine this new ‘affordability’ with the ongoing buyer demand and the still historically low mortgage rates and throw in some incentives (such as first-time buyer programs) and the province is poised to see a rise in sales activity and prices going into 2020. ­­

“A growing number of buyers in the [Lower Mainland] region have idled on the sidelines waiting for improvements in affordability following mortgage stress tests. Significant price declines over the past year and lower borrowing costs have buyers returning to the market among all housing types, particularly in the lower-priced condominium sector,” writes report authors.

As a result, Central 1 is predicting a 3.9% increase in the median house price in the Lower Mainland.

Specifically, the median price for Vancouver CMA is expected to rise by 3.6% in 2020, although other areas in B.C. are not predicted to do as well. For instance, the median price for Abbotsford CMA is expected to drop almost 1% in 2020; the median price for Victoria CMA is expected to match inflation, at 2%, while the median price for Kelowna CMA will rise 0.8% in 2020.

The Prairies

Perhaps the hardest-hit provinces, when it comes to the mortgage stress test, were Alberta and Saskatchewan. Hit by resource sector price fluctuations, as well as trade and tariff headwinds, these provincial economies struggled over the last few years — and 2019 was no exception.

In Alberta, the two largest cities, Calgary and Edmonton, continue to struggle. According to CREA, the national price of a home in Calgary declined 2.3% between November 2018 and November 2019. Edmonton wasn’t much better, with an average property price decline of 1.8%.

The good news is that condos in this province are some of the cheapest and easiest ways for first-time buyers to get into the property market. Starter units are selling for as little as $150,000, which makes it an affordable option for first-time buyers and for investors with a strong appetite for potential ups and downs.

Saskatchewan also experienced national house price declines of 1.1%, but that masks how hard Regina was hit in the soft-landing market correction that started in 2018 and appears to have ended in 2019. This city’s national housing price declined by 5.5% between November 2018 to November 2019.

Going forward, both provinces will need to see stronger employment and continued rise in population growth — two strong indicators that there is work and people ready to do the work.

One bright spot in the Prairies was Winnipeg, MB. The overall provincial price increase was a more than respectable 3.8% increase, but Winnipeg clocked a 5.5% increase in its average property price between November 2018 and November 2019. It appears the overbuilding fears that existed for this city have been quashed as inventory was snapped up over the last 24 months. This is due, in part, to increased immigration to the city partly because property prices are still reasonable and partly because employment is steady and predictable.

Ontario and Greater Toronto

While there may have been doubts in August 2019, there is no doubt as the 2020 year starts: Greater Toronto is set to experience a strong housing market in 2020.

The area boasts lower unemployment rates, excellent economic growth and increased demand from ageing millennials and new immigrants.

Ontario ended the year with a 9.5% increase in the average house price. Surprisingly, much of that growth did not come from the Greater Toronto area — which experienced a 6.8% price increase by the end of 2019 — but from surrounding municipalities, such as London & St. Thomas (+10.7%), Kitchener-Waterloo (+17.8%), and Kingston (+11.5%).

Still, the prediction is that the Greater Toronto Area will see an estimate average price increase of 6% in 2020.

The biggest reason for the continued price hikes is that the GTA suffers from a serious lack of supply when it comes to housing. While there is plenty of construction going on in Toronto, the new builds can’t seem to meet the ongoing need and demand of buyers in the region.

When you move outside of the GTA, we find that many markets still favour the seller. For instance, Ottawa and Windsor showed substantial increases in their average home prices (11.7% and 11%, respectively) and sales activity and, subsequently, price growth isn’t expected to dwindle in 2020.

Atlantic Canada

The Atlantic provinces offer some of the most affordable housing prices in the nation, but finding employment is a sticking point. The good news is that most cities in the Atlantic provinces appear to have diversified away from resource sector employment and into tech-inspired industries. According to a report by TechImpact, tech industries contributed $6.1 billion to Atlantic Canada’s economy in 2017 (up from $5.2 billion in 2014). Recent reports show that the biggest impediment to the area’s tech-growth is a lack of qualified labour — a situation that has drawn the attention of provincial and municipal governments as they attempt to close the gap and increase their economic output.

The overall result, however, is a more robust, and predictable, economy that attracts many buyers to the region. And it shows in the overall housing numbers.

At the end of 2019, New Brunswick’s average housing price increased 4.8%; PEI’s average housing price increased 8.7%; Newfoundland & Labrador’s average housing price increased 6.6% and, Nova Scotia defied estimates with an annual price increase of 18.7%.

The region’s multi-family and condo market are being driven by retirees, eager to cash out on the built-up equity in their home. This helps first-time buyers, particularly those that are ready and poised to start a family, to get into the market at affordable prices.

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Romana King

Romana King is an award-winning personal finance writer, real estate expert and the current Director of Content at Zolo. Romana has contributed to business and lifestyle publications including, Toronto Sun, Maclean’s, MoneySense, Globe & Mail Custom Content Team, and The Toronto Star. Among her achievements, Romana won silver for her annual Where to Buy Now real estate package in the 2019 Canadian Online Publishing Awards. In 2015, she won a SABEW Business Journalism award. When she was editor of CI Top Broker, Romana helped guide her team to obtain its first KRW Business Journalism nomination, and in 2011, she was part of a small team that helped MoneySense win Magazine of the Year at the 34th annual National Magazine Awards.