The ultimate question appears to finally have an answer: There will be no housing crash in Canada. A soft-landing? Yes. A relatively slight correction in even the hottest markets? Absolutely. But a crash? Experts from across various different disciplines tend to agree: Not likely.
For a decade prices have accelerated at times reaching what appeared to be fundamentally unsustainable levels, but the long-anticipated crash (predicted in 2008, again in 2009, and again in 2010, and so on) is not going to happen.
But that silver lining comes with a lot of heartaches. Housing is still very unaffordable in two market segments—the Greater Vancouver Area and the Greater Toronto Area. Plus, those that recently bought during the property markets heyday, may have to endure some erosion of equity as markets adjust and correct in this upcoming year of slower, more stable activity.
So, what should buyers, sellers, current homeowners and real estate investors do in 2018? We’ll tell you.
What should Canadian home buyers do in 2018?
According to an analysis completed by RBC Economics at least half of the country’s housing markets were in balanced territory by mid-2017. Toronto and Calgary were considered to be firmly planted in balanced territory, while Montreal and Vancouver were close to balanced, but leaning towards a seller’s market. This analysis was based on the sales-to-new-listings ratio, where a market is considered balanced if the ratio is close to 50%.
But statistics are somewhat subjective and we all know that you improve or shape the outcome by manipulating the question. Examine the months of inventory data—determines how long it would take for all properties to sell based on current sales activity—rather than sales to new listings, and it appears Southern Ontario is still very much entrenched in a seller’s market.
In the Greater Golden Horseshoe area, which includes Toronto, there were only 2.4 months of inventory at the end of December 2017. While this is much better than the all-time lows experienced in February and March 2017—when inventory dropped to just 0.8 months—it’s still below the region’s long-term average of 3.1 months and it still puts the GTA firmly in seller’s territory.
Toronto wasn’t alone. Vancouver was also in a seller’s market for all of 2017, a fact that would ring true for just about anyone trying to buy in this hot west coast city. Ottawa was also in seller’s territory up until mid-2017, when it levelled off and stayed within balanced market territory for the rest of 2017. On the other hand, Calgary started off 2017 deep in a buyer’s market, as did Edmonton and Montreal, but Calgary ended the year in a balanced market, while Edmonton and Montreal remained in the buyer’s market territory going into 2018.
“More stringent mortgage lending rules coming into effect in January  no doubt prompted many buyers to advance their purchasing decisions [in 2017],” explains Robert Hogue, senior economist at RBC Economics, in his December 2017 economic report. As a result, Hogue and many other analysts don’t see this last-minute year-end activity continuing into 2018. In fact, most analysts are predicting a big chill across Canada’s housing market and this will help moderate home sales activity, which will suppress any price appreciation, particularly in the nation’s hottest real estate markets. As Hogue puts it: “Near-term volatility will be followed by a generalized softening in 2018.”
For those looking to buy, this sounds ideal. The market is softening, price appreciation is forecasted to be low or non-existent and inventory numbers are rising. But it’s not that simple. One reason for this forecasted slow down are tighter mortgage lending rules and the threat of higher interest rates—headwinds that will certainly impact a percentage of the current number of would-be home buyers in Canada.
Mortgage stress test impact and higher interest rates
For buyers ready to enter the property market in 2018, you’d be wise to secure a mortgage pre-approval, as soon as possible. While the most competitive lenders refuse to pre-approve (they have no competitive reason for doing so), it’s still a good idea to get a pre-approval even if you end up shopping around last minute.
First, it locks in rates, so if the Bank of Canada does raise rates before you finalize your deal you are locked in at that lower rate. In the Bank of Canada’s November 2017 Financial System Review report, the central bank confirmed rates will rise in 2018. The rise will be slow, in order to achieve more normal interest rate levels, but it will happen. Considering the Bank raised rates for the first time in seven years last year, not once but twice, this warning needs to be heeded.
Second, it gives you the maximum amount you can borrow, which, combined with your down payment, helps you determine your absolute maximum purchase price. This is important. As of January 1, 2018, buyers now face much tighter lending requirements. Depending on your financial situation, this can mean that your maximum house buying budget shrunk by 5% to 25% with this new rule. (Analysis shows that one in six borrowers, who put down less than 20%, will have to reduce their house budget, on average, by 18%.)
Potential increase in shadow-lending in 2018
For those determined to get in but unable to get a mortgage from a bank, you may have to consider shopping for a mortgage loan through an alternative lender.
Alternative lenders specialize in buyers turned down by banks, as they allow for more non-traditional income and permit higher debt ratios (up to 50% total debt service ratio, versus 42% used by the banks). Quite often, a mortgage broker can also get you a longer amortization, which lowers your debt service ratio used to qualify for the loan, just don’t be surprised when you have to pay mortgage default (aka: CMHC) fees.
Plus, with the new mortgage stress test, alternative lenders may adapt the way they do business. In the past, these non-prime lenders charged higher mortgage rates (to reflect the higher risk of the borrower). Going into 2018, alternative lenders may opt to cut the rate (to balance the debt ratio) but make up the lost revenue by tacking on a fee.
What should Canadian sellers do in 2018?
The year 2018 will be a recalibration year for sellers. At least half of the major real estate markets ended 2017 in balanced territory—meaning neither buyers or sellers have an advantage. Those markets that aren’t balanced are expected to recalibrate in 2018—and this includes the hottest markets of Vancouver and Toronto. As a result, sellers will need to reset their expectations.
For instance, those selling a Toronto property in 2016 waited only 23 days, on average, for a firm deal. In 2017, the number of days before finalizing a sale increased to just under 27 days. Four extra days, on average, doesn’t sound like a lot but in a crazy, hot market any slowdown in activity means a shift. Going into 2018, this shift will be exacerbated by the strong headwinds would-be buyers face. As a result, analysts anticipate less activity and fewer sales and, eventually, this will mean changes in house prices. Late last year, the Canadian Real Estate Association (CREA), the national trade organization that represents real estate brokerages and agents, projected a 1.4% drop in the national average house price in 2018. Given that average national housing price in 2017 was $503,400, this 1.4% drop represents a $300 drop. Again, it’s not significant but it’s a good indication that we have crested and past the peak of this current housing market cycle.
“When you communicate what a potential price drop may actually mean, most sellers realize they are still coming out ahead,” explains Mustafa Abbasi, President of Zolo Realty, a national brokerage and one of the fastest growing online real estate marketplaces. Even a price drop of 10% to 15% won’t reset a home’s value to pre-2016 price levels. “The run-up in prices over the last few years has been so substantial that even a double-digit price drop will have relatively little impact.”
To stay competitive, sellers will need to scrutinize current sales data for the street and neighbourhood. If possible, walk through the open houses in your community. On the ground research provides a more comprehensive understanding of what types and styles of homes command the best prices.
Finally, discuss with your real estate agent competitive pricing strategies. “The local agent understands the current market trends and can help you position yourself for success in that market,” says Abbasi.
What should current homeowners do in 2018?
If you’re a current homeowner that has no need to buy or sell, now is a great time to sit and wait out whatever market volatility may be left in the property cycle. But that doesn’t mean current homeowners are immune to the changes and the market cycles.
According to Bank of Canada, half of all current mortgages will “reset” in 2018—meaning 47% of mortgage holders will need to renew their mortgage. Fast-forward another three years to 2021 and another 31% of current mortgage holders will need to renew and a couple years after that and another 22% of mortgages will need to be renewed. What does all this mean? In the next five years, there will be a surge of mortgage renewals and a percentage of these homeowners will get caught up in the mortgage stress test mess.
The easy solution to avoid the new mortgage lending rules is renew with your current lender. But don’t kid yourself. Your lender has the numbers and they’ll know whether or not you are in a position to shop around.
If you’re a current homeowner who was proactive about paying off their mortgage debt you’ll have the option to shop rates and that could make your current lender competitive. But if you refinanced or racked up other types of debt, then you may end up feeling the pinch. Your current lender probably won’t offer the best rates; shop around for a better rate and you’ll be subject to the new mortgage lending rules, which means qualifying for the mortgage based on the posted rate, which is closer to 5% (and will climb as rates climb).
Homeowners are already getting a taste of this treatment. One Toronto homeowner was told that the 5-year-fixed term rate of 3% that he’d negotiated with a back in 2012, would renew at 8.99%. When he shopped around he realized that he may be able to find a lower rate, but he would have to settle for a smaller mortgage loan. Stuck, he ended up renewing with his current lender at the higher rate—and his monthly budget took a big hit.
Believe it or not, it would’ve been worse if this homeowner needed to refinance. Those with more debt have higher debt ratios and this hinders their ability to qualify under the new mortgage lending rules.
Even homeowners will significant equity in their homes will feel the pinch. Those looking to obtain a Home Equity Line of Credit (HELOC) will no longer qualify based on the posted 4.89% rate. As of January 1, 2018, this rate increased to 5.7%—and this rate will continue to increase as rates rise.
What should investors in Canadian real estate do in 2018?
CREA predicts that in 2018, the number of home sales will fall by 5.3%. This predicted decline in activity will prompt a 1.4% drop in national average housing prices from $503,400 to $503,100. If CREA’s prediction turns out to be true, 2018 will be the first year the national housing price will have fallen in Canada since the start of the global recession in 2008.
But the impact of a slowing market will not be felt uniformly across the country. According to CREA estimates sales activity across Canada will pan out in the following ways:
- In B.C., 3.7% decline;
- In Alberta, a 2.8% decline;
- In Saskatchewan, a 3.8% decline;
- In Manitoba, a 3.9%, decline;
- In New Brunswick, a 0.5% decline;
- In Nova Scotia, a 2.8% decline;
- In Ontario, a 9.6% decline;
- In Prince Edward Island, a 7.4% decline;
- In Quebec, a 0.9% increase;
- In Newfoundland, a 1.3% increase.
While a decline in sales activity usually prompts a decline in prices, this isn’t necessarily the case.
- In Newfoundland, prices are expected to drop by 1.9% in 2018;
- In Alberta, prices are expected to nudge up by 0.3%;
- In Ontario, prices are expected to rise by 2.2%;
- In B.C. and Saskatchewan prices are expected to flatline (not rise, not decline);
- In Manitoba, prices are expected to increase by 1%;
- In PEI, the prices are expected to rise by 0.9%;
- In Nova Scotia, prices are predicted to increase by 2%;
- In New Brunswick, prices are expected to rise by 1.8%;
- Finally, in Quebec, average prices are expected to rise by 4.2%.
For real estate investors with a plan that includes a cash-flow positive property, a single-family detached home may not be an option due to high purchase prices. This leaves condos and multi-family options (such as a duplex or triplex). But any investor looking for these types of properties will need to be prepared for heavier competition since first-time buyers who now feel even more pinch from the new mortgage test, may end up looking for a more affordable condo and multi-family property options.
Whether you’re buying, selling, flipping a property or you just want to maintain your home’s value, this New Year should be about taking stock. Remember the old rule of thumb: Don’t make any property decisions without first understanding how it impacts your overall financial plan.
View all posts in this series
- Canada’s housing market in 2017: A year in review
- Canada housing crash not coming in 2018
- 8 real estate market trends to watch for in 2018
- What do home appraisers see for Canada’s housing market in 2018?
- 2018 offers better, more saner opportunities: Realtors
- 17 strange real estate stories of 2017
- Design trends for 2018
- Luxury real estate will thrive in 2018
- Choosing colour of the year
- Wading into the housing market in 2018? Here’s some advice
- 4 things to know about the real estate market correction in 2018
- Real estate hangovers of 2017 that will impact 2018