Canada’s Real Estate Party Isn’t Over Yet

Prices Still Going UpA flurry of new economic forecasts say that despite the impact of falling oil prices and fear of condo overbuilding, Canada’s real estate markets will remain stable in most regions through 2016, and will experience a “soft landing” in Vancouver and Toronto once interest rates begin to rise.

“The risk of a market crash is low under our base scenario of a gradual pace of interest rate increases and continuing growth in the economy,” says Robert Hogue, senior economist with RBC Economics.

He says “Canadian housing market’s remarkable flight of the past 10 to 15 years” is threatened by the drop in oil prices and fear that Toronto’s condo market is overbuilt. But he says, “In our opinion, the risk of a crash — resales plummeting by more than 25 per cent nationwide for instance — is low for three main reasons.”

RBC expects the economy to grow, creating jobs and increased incomes. “Second, we expect demographic demand to remain fairly brisk with household formation being sustained by strong immigration…..Third, the rise in interest rates is likely to be a gradual and drawn-out process. We believe that monetary authorities in Canada and abroad will proceed very cautiously. These three factors will minimize the magnitude of any correction.”

Diana Petramala, economist with TD Economics, says housing markets in Toronto, Vancouver, Hamilton and Victoria are “humming” while “commodity-dependent regions, such as Edmonton, Calgary, Regina and Saskatoon have weakened considerably…but to a lesser degree than was originally anticipated. Elsewhere, markets that had embarked on soft landings over the last few years, including Ottawa, Montreal and Quebec City, have seen activity either stabilize or perk up.”

Petramala says that “with the economic backdrop remaining comparatively favourable in Ontario and B.C., a severe correction in housing activity will likely be avoided. Following an estimated expansion of roughly eight to 10 per cent in 2015, average home price growth in Ontario and B.C. is poised to slow to just three to five per cent next year.”

A report about the condo market by Genworth Canada and the Conference Board of Canada says, “Rapid house price increases in Toronto and Vancouver have been driven by single-detached homes and row units. Price increases for apartments have been much less frothy. Accordingly, nowhere do we see a condominium bubble about to burst.”

In an article entitled Is Canada Building Too Many Homes? Sal Guatieri, senior economist with BMO Capital Markets, says, “If Toronto truly had too many condos, the rental vacancy rate would be rising, while rent and prices would be falling (no one pays more for something that is in abundance). The city is building a lot of condos for good reason — they’re needed by the tens of thousands of people moving to the region each year who can’t afford a detached home (partly due to development restrictions) or simply prefer the condo lifestyle.”

Guatieri says Canada has neither a glut nor a shortage of homes, except in Vancouver and Toronto, where the lack of listings for detached homes have pushed average prices above $1 million.

He says that “should temper any price correction, unlike in the U.S., where massive overbuilding led to a four percentage point slide in residential construction’s share of GDP.” He says that currently in Canada, “the share of GDP devoted to building homes, as opposed to fixing them up or selling them, is actually much lower than commonly believed and, in fact, is only modestly above historical norms.”

Hogue says that construction of single detached homes fell by almost one-quarter in Vancouver and by half in Toronto during the last decade, due to restrictive urban development policies. “With demand outstripping supply, it is not entirely surprising to see high and rapidly rising prices in these market segments,” he says. “Having said this, we do not dismiss the notion that some degree of overvaluation has crept in. Even so, we would not expect that the mere presence of overvaluation triggers a price decline — Vancouver is a prime example where extremely poor affordability can persist for years, if not decades, without tripping the market.”

The WealthScapes 2015 report by Environics Analytics says that Canadians experienced a “period of robust fiscal health” in 2014, largely because of real estate, which increased by a “solid but not-too-bubbly five per cent”.

It says Vancouver, Calgary and Toronto are the wealthiest cities in the country, largely because of their real estate values. “Vancouver continues to reign as Canada’s wealthiest city because of its pricey real estate — averaging $611,800 per household compared to $555,341 in Toronto and $524,737 in Calgary. In Canada’s most populous city, Toronto, growth in both real estate values and pensions helped push net worth up.”

The company says that while 2014 was an “up” year, the “serious economic headwinds that are affecting the Canadian economy in 2015 have not yet spread to Canadian household balance sheets.”

The report also found that rising real estate values helped narrow the gap between the wealthiest Canadians and those in the lowest group. “The net worth of the lowest quintile grew by 9.3% — the most of all quintiles — as the value of their real estate and liquid assets grew rapidly,” says the report.

Written by Jim Adair