{"id":4790,"date":"2018-01-11T05:00:16","date_gmt":"2018-01-11T10:00:16","guid":{"rendered":"https:\/\/www.zolo.ca\/news\/?p=4790"},"modified":"2022-06-07T19:47:25","modified_gmt":"2022-06-07T23:47:25","slug":"4-things-know-real-estate-market-correction-2018","status":"publish","type":"post","link":"https:\/\/www.zolo.ca\/blog\/4-things-know-real-estate-market-correction-2018","title":{"rendered":"4 Things to Know About the Real Estate Market Correction in 2018"},"content":{"rendered":"\n
If you own real estate in Canada you may be feeling a bit of anxiety right now. As we head into 2018, there is a great deal of talk of a \u201csoft-landing\u201d and a \u201cflat-lining\u201d market \u2014 and this prompts concerns about an overall market correction and possible housing price declines.<\/p>\n\n\n\n
At this point, the truly catastrophic folks are calculating how long they\u2019ll have to work into their retirement years in order to make up the loss. But market corrections aren\u2019t always a bad thing. Here are four things you need to know about this year\u2019s real estate market correction.<\/p>\n\n\n\n
#1: Why Do We Need Some Perspective?<\/h2>\n\n\n\n
Market\u2019s are cyclical. The stock market is cyclical, the option\u2019s markets are cyclical, as are real estate markets.<\/p>\n\n\n\n
Markets build-up, peak, then fall \u2013 when the process starts all over again.<\/p>\n\n\n\n
For the better part of the last decade, we\u2019ve been in the build-up phase of the cycle. Based on preliminary annual sales numbers it appears that most Canadian real estate markets hit their peak in 2017 and then started to fall. When a fall precipitates a 10% reduction \u2014 either in sales activity or pricing \u2014 it\u2019s known as a correction.<\/p>\n\n\n\n
Take, for example, the Greater Toronto Area market. While still considered one of the hottest property markets in Canada the GTA experienced a 7.1% drop in sales activity between 2016 and 2017. As a result, prices only ticked up, on average, by 0.7% year-over-year, while the average Days on Market (the number days a property sits on the market before selling) rose by 35%.<\/p>\n\n\n\n
Historically, real estate market corrections are regular events that steadily occur over an 18-year rhythm, according to economist Homer Hoyt. This doesn\u2019t mean that each market cycle lasts 18 years, but when Hoyt averaged out each market cycle, based on peaks in U.S. land values, the cycles lasted, on average, every 18 years. And this had been true since 1800.<\/p>\n\n\n\nFred E. Foldvary “The Depression of 2012”<\/figcaption><\/figure>\n\n\n\n
So, where are we now? It depends on what market you look at. In the U.S., the 2008 Great Recession prompted a crash in the U.S. housing market. As a result, economists are predicting that the next American real estate won\u2019t happen until 2024 when the cycle will start all over again.<\/p>\n\n\n\n
In Canada, the last major price correction was between 1992 and 1996, when national housing prices appreciated by an anaemic 1%, compared to the 16% appreciation between 1988 and 1992 and the astronomical 70% price appreciation experienced between 1984 and 1988. Given this timeline, Canada is certainly overdue for a price correction (by about four years).<\/p>\n\n\n\n
Keep in mind, however, that each market inside Canada will also move at its own pace. While Canada\u2019s price correction is about four years overdue, Vancouver\u2019s price correction is right on track. The last price correction was around the year 2000 when prices appreciated a meagre 3% (compared to 26% in the four years leading up to 2004, 59% in the four years leading up to 2008 and the 23% in the four years leading up to 2012).<\/p>\n\n\n\n
It\u2019s safe to say, then, that we are in the midst of a Canadian real estate market correction. And that\u2019s normal and good.<\/p>\n\n\n\n
#2: But, Why Is a Correction Happening Again?<\/h2>\n\n\n\n
Why? Corrections happen because investors become too optimistic about a certain asset and, in a frenzy, they keep buying that asset. This frothy activity pushes prices for the asset up and this creates more frenzy and optimism. This is when an investment\u2019s price becomes disproportionately high compared to its actual worth. Some people realize this and get out. This can prompt a sell-off \u2014 when investors become highly sensitive and react to the potentially bad news by selling their stake. This causes prices to fall, or correct.<\/p>\n\n\n\n
While real estate is more than an investment \u2014 it\u2019s a lifestyle choice as well a personal financial decision \u2014 it\u2019s still subject to market sentiment and this adds volatility to it as an asset class. In the last decade, there’s been a run-up in property prices. As a result, bankers, economists, analysts, columnists and financial planners are warning Canadians. This negative sentiment, combined with a lack of housing affordability and other economic realities, is prompting sensitivity among potential buyers. This combination of high asset valuations and spooked investors signals a cycle peak and eventually a market correction. The rhythm of real estate continues. A market correction is happening again. Relatively on schedule, if you believe Hoyt’s analysis.<\/p>\n\n\n\n
#3: The Top Dogs Aren\u2019t Afraid, Why Should You Be?<\/h2>\n\n\n\nBank of Canada<\/figcaption><\/figure>\n\n\n\n
In late November 2017, Bank of Canada Governor Stephen Poloz released a report where he flagged the steady climb of household debt and the still-hot housing markets across the country as the financial system\u2019s top vulnerabilities.<\/p>\n\n\n\n
\u201cOverall risks to the Canadian financial system remain elevated,\u201d he wrote. However, it wasn\u2019t all doom and gloom from the nation\u2019s top banker. \u201cSome preliminary signs of improvement, however, are emerging.\u201d The report added: \u201cBetter economic conditions and several new policy measures support prospects for additional progress.\u201d<\/p>\n\n\n\n
In particular, Poloz and his BoC analysts were pleased by the initial impact of the stricter lending rules that were announced in late October (but didn\u2019t come into effect until January 1, 2018). Despite elevated sales activity in the last two months of the year, the underlying trend in most Canadian markets was a slow down and a return to a more stable and balanced market.<\/p>\n\n\n\n
For Poloz, the big concern was how susceptible these vulnerabilities were to an economic shock. Think about the economic fall-out when oil prices dropped in 2008 and, then again, in 2014. \u201cAny shock that comes our way is going to be magnified by those vulnerabilities and that\u2019s a concern for us,\u201d said Poloz in November 2017. Still, Poloz believed that these \u201cvulnerabilities\u201d would be vastly reduced with the introduction of the new mortgage stress test and the forthcoming interest rate hikes.<\/p>\n\n\n\n
Remember, for the first time in seven years, the BoC raised interest rates in 2017. While both rate increases were nominal \u2014 a quarter percentage point in July and another in September \u2014 it signalled a change in the central bank\u2019s monetary policy. Now, the BoC is expected to continue gradually hiking rates going into 2018 and beyond.<\/p>\n\n\n\n
#4: Our Economy Is Gradually Picking Up Momentum<\/h2>\n\n\n\n
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