Friday, 20 July 2018
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Canadian House Price Growth Is Slowing - And That's A Good Thing

Written by Posted On Monday, 09 July 2018 18:10

Canadian house prices are rising at their slowest pace in almost nine years, reports RBC Economics. The national benchmark price was up by just one per cent year-over-year in May, and prices were below last year's levels in many centres including Toronto.

"The trio of new mortgage regulation, higher interest rates and additional market-cooling measures in B.C. (and earlier in Ontario) is proving to be a tougher challenge than we anticipated," says RBC senior economist Robert Hogue. "Still, we don't see any evidence that Canada's market is becoming unhinged at this point. We continue to believe that recent developments are mostly positive for the longer-term health of the market despite the ongoing ‘landing' being a little rougher than we previously thought."

Canadian Real Estate Association president Barb Sukkau says, "The stress-test that came into effect this year for homebuyers with more than a 20-per-cent down payment is continuing to suppress sales activity."

Hogue says the slowdown has "dialed down earlier worries about the Toronto and Vancouver area markets" being overheated but has allowed "up-trending markets such as Ottawa and Montreal (to) keep chugging along."

But the unintended consequences of the regulations has made it tougher for markets that were already struggling to make a recovery.

Despite that, "Policy-makers should be generally pleased with how things turned out following the significant measures that were implemented in the past year. For the most part, any froth that existed before is gone; markets have swung back to balance, and prices are now rising at a much more subdued pace," says Hogue.

Ted Tsiakopoulos, Canada Mortgage and Housing Corp. (CMHC) Ontario regional economist, says in a report that "home prices in some major centres grew at rates well above historical averages in recent years and exceeded what fundamentals such as population, income and interest rates would support as evidenced by the presence of overvaluation."

But he says this overvaluation and the more restrictive government policy "were not sufficient to trigger a bust period due to the absence of a fundamental shock" to the economy.

"The likelihood of an imminent price bust is currently low, as opposed to being moderate in early 2017," he says. "This can be explained by an improvement in economic and demographic conditions.

"While we expect economic growth in Ontario to slow in 2018 and 2019, employment and incomes will continue to grow, supporting Ontario housing prices," says Tsiakopoulos. "In addition, high levels of in-migration, resale markets that remain balanced and modest increases in new supply relative to new households formed suggest the current correction in house prices should be short-lived."

A deeper dive on CMHC research about Canadian house prices found that in recent years, 48 per cent of homebuyers in Toronto and Vancouver spent more than they budgeted for on their home purchases, compared to 24 per cent of buyers in the less-frantic Montreal market. About 55 per cent of buyers in Toronto and Vancouver were in a bidding war, compared to 17 per cent in Montreal.

Guillaume Neault, CMHC senior manager, analytics, says a fear of missing out could have an impact on why buyers went overbudget, causing buyers to purchase sooner than planned. Or, they may have waited too long and had to spend more than expected when prices rose.

The CMHC survey results "highlight the self-reinforcing relationship between bidding wars and optimism," says Neault. "Those who experienced a bidding war and highly value future growth have higher short-term price expectations than respondents who did not report participating in a bidding war. This would suggest buyers rationalize their purchase because of future growth."

Neault says it's striking that there is a significant gap between perceptions of the public and some available data.

For example, 68 per cent of buyers in Vancouver and 48 of buyers in Toronto believe that foreign investors have a lot of influence in driving up home prices. Yet Statistics Canada says the share of non-resident ownership was 4.8 per cent in Vancouver and 3.4 per cent in Toronto.

Citing work by economist Robert Shiller, Neault says, "The human brain has a natural draw toward stories whether they are factual or not. As he suggests, stories are powerful instruments to share information and reproduce narratives with economic impact. It is still a challenge for economists to quantify and measure the impacts of narratives on the housing market, but it is a challenge we will seek to address."

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Jim Adair

Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He has been writing about Canadian real estate, home building and renovation issues for more than 30 years. You can contact Jim at jim@remonline.com.

www.remonline.com/

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