May 19, 2017
Even a 20% drop in house prices can’t eradicate built-up equity, but current buyers and sellers are in for some interesting times
For homeowners the great, big, unanswered question is whether or not the Canadian real estate market will finally crash in 2017.
Turns out, all reports and analysis lean towards a flattening out of property prices in most Canadian markets, with some areas of the country experiencing a decline in both sales activity and prices, as other areas continue to experience price gains, albeit at a much slower pace than we’ve seen in recent years.
Keep in mind, housing markets are not as prone to bubbles, and to burst bubbles, when compared to other financial markets. This is, in part, due to the large transaction and carrying costs associated with owning real property. However, over the last few decades, the combination of very low interest rates and the regulations that allow easier access to mortgage financing has prompted more borrowers to enter the real estate market and this has put increased pressure on demand. For a crash to occur, there would need to a sudden drop in demand, such as a fairly quick rise in interest rates or significant a tightening of credit standards.
According to the Canadian Real Estate Association (CREA), national sales are forecast to drop in 2017 by 3.3%, compared to the previous year. In its annual year-end report, CREA states: “Transactions in B.C. and Ontario are anticipated to remain strong but fall short of this year’s record levels due to deteriorating affordability, an ongoing shortage of affordably priced listings for single family homes and tightened mortgage regulations.”
As a result, CREA predicts:
→ Home sales to decline in B.C. by 12.2%
→ Home sales to decline in Ontario by 2.7%
→ Home sales to decline in Saskatchewan by 1.2%
→ Home sales to decline in Nova Scotia by 2.1%
→ Home sales to decline in PEI by 2.2%
→ Home sales to decline in Newfoundland & Labrador by 1.4%
However, not all areas will see price declines:
→ Home sales will rise in Alberta by 3.5%
→ Home sales will rise in Quebec by 1.2%
→ Home sales will rise in Manitoba by 0.8%
→ Home sales will rise in New Brunswick by 1.6%
A decline in sales activity should prompt a decline in prices as less activity is usually a result of less demand and less demand usually translates into lower house prices.
For instance, the reduction in home sales in PEI is due, primarily, to an unusually strong 2016 selling season, that “is not expected to reoccur in 2017,” CREA explains in its year-end report. Still, the province can still expect to reap the rewards of a weakened Canadian loonie.
But not all markets should expect price drops in 2017. According to CREA predicitions, home sales will rise in Alberta and Quebec primarily because both markets experienced a slowdown in 2016.
Still, a decline in sales activity will prompt a modest decline in home prices in a few provinces, including: B.C., Saskatchewan, Nova Scotia, PEI and Newfoundland & Labrador.
As a result, CREA predicts that the national average price will actually decline in 2017 by 2.85%, to $475,900.
Despite a predicted decline in sales activity for 2017, most of Ontario’s housing markets won’t experience price declines this year. This is particularly true for homes located in the Greater Toronto Area and in the larger Ontario region known as the Golden Horseshoe. This is due, primarily, to a pronounced lack of supply of housing stock, particularly for low-density, single-family detached homes.
This lack of supply means that seller’s are sitting pretty in a very heated seller’s market, which is measured by the months of inventory (ROI) ratio. The basic rule of thumb is that an ROI that’s below four months (120 days) is solidly in seller’s territory; by the end of 2016, the GTA had 36 days of inventory.
This obvious lack of inventory certainly had an impact on housing prices. Between November 2015 and November 2016, the average selling price of a GTA home rose to $776,684—up 22.7% on a year-over-year basis.
As a result, anyone in the market to sell a home in the GTA or in the surrounding areas, including Niagara, Hamilton, Halton, Peel, York and Durham, can continue to expect strong demand. This should translate into higher sale prices and fewer days on the market.