Thursday, January 10, 2019

Policy decisions, interest rates slowed the real estate market, and they're needed for a rebound


As real estate market stats pour in from across Canada, it is becoming abundantly clear that property markets in 2018 lost the momentum of recent years.
Households, governments and industry watchers alike are concerned about the direction real estate markets have taken. Even though sales and, in some places, prices, are lower than before, housing affordability has not necessarily improved.
Many wonder if it is the right time to buy or sell. Others wonder whether real estate markets are going to decline even further, or if the markets will turn around in 2019.
The answer to these questions is: It depends. It depends upon interest rates, job growth, wage increases, demand for housing, government interventions and more. While one can speculate about the future, it is always beneficial to first understand what has transpired in the past.


The Greater Toronto housing market, the largest in Canada, has recorded fewer sales in 2018 than it did in any year in the past 10 years. In fact, the last time Toronto’s real estate market recorded fewer than 80,000 sales was in 2008
Vancouver’s housing market, in which 24,619 sales were recorded in 2018, was no better. The Real Estate Board of Greater Vancouver noted that sales in 2018 hit “the lowest annual total in the region since 2000.” The composite benchmark price in December 2018 declined by 2.7 per cent from a year earlier.
Despite declining prices, many believe that housing affordability is unlikely to improve. A recent report by the Royal Bank of Canada (RBC) observed that homeownership costs relative to median incomes will continue to rise in Canada. The RBC report said that by the end of 2019, “owning a home will take up 79 per cent of the median household income” in Toronto.
In Vancouver, home ownership costs claim 88 per cent of the median household income. RBC expects home ownership costs to rise in Calgary, Edmonton, Ottawa and Montreal.
The high levels of household debt in expensive housing markets is another source of concern. The Canada Mortgage and Housing Corporation reported that the debt-to-income ratio was 208 per cent for the residents of Toronto. For Vancouverites, it was even worse at 242 per cent.

… the debt-to-income ratio was 208% for the residents of Toronto. For Vancouverites, it was even worse at 242%

Most of the household debt is mortgage debt, which is sensitive to changes in interest rates. The Bank of Canada has raised interest rates multiple times in the past few years. The Bank’s decision Wednesday not to raise rates any further suggests it is mindful of the slowdown in the global economy that has been worsened by the trade tussle between the U.S. and China.
While the consensus is lacking about the future of interest rates in Canada, many believe that the fundamentals are missing to justify significant interest hikes in Canada in 2019. This will be good news for home ownership.
Housing markets have withstood a series of policy interventions by provincial and federal governments that include additional transactional taxes on foreign homebuyers, stringent mortgage regulations, stress tests, rising interest rates and more. The slowdown in housing markets, one must realize, is the expected and intended response to a series of regulatory changes and hence must not be viewed solely as a sign of market weakness.
At the same time, one should also consider a long-term view of the property markets. Housing is a durable good that provides shelter and other amenities while growing in value as an asset class. The average home price in the cities and surrounding areas of Vancouver and Toronto is up 100 per cent over 10 years.
The increase in average housing prices over the long run should, therefore, provide perspective to those who own or are considering buying a house.

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