National Housing Update: How the Real Estate Industry is Faring One Month into 2019

Real estate news is typically quiet in January, but there’s been quite a few developments as of late. To quickly recap, Canadian real estate in 2018 ended with four consecutive months of sales declines. Overall, there was a drop of 11 per cent nationwide, with the 2.5 per cent drop from November to December being the biggest month-to-month change in eight months. To no one’s surprise, Toronto and Vancouver led that decline.

The slowdown in 2018 wasn’t a total shock. The Office of the Superintendent of Financial Institutions (OSFI) introduced a new stress test last year that made getting a mortgage more difficult for some people, while the Bank of Canada continued to raise interest rates. These two factors combined with record debt levels cooled the housing market, but we’re definitely not in correction territory.

No sales data yet for 2019, but the industry is still buzzing

At the time this post was written, sales data for January has still not been released, but a few interesting things have already occurred.

At its first announcement of the year, the Bank of Canada decided to hold the overnight rate at 1.75 per cent in January. This is significant as the Canadian economy was strong in Q4, so many people (including the banks) assumed we would see another interest rate hike.

However, December saw the TSX drop quite a bit and there continued to be an international trade conflict which likely forced the BoC to keep things steady. A few days after the interest rate announcement was made, many of the major banks lowered their 5-year fixed mortgage rates to reflect the current market conditions.

As the events of 2018 played out, it also had an effect on new-construction home sales as they hit a 20-year low last year in the Toronto area according to the Building Industry and Land Development Association (BILD). This was the second year in a row where there was a decline, with the benchmark price for new construction dropping 6.7 per cent year-over-year in December.

It’s clear that consumer confidence is down as a recent survey from Re/Max found that many single Canadians who have the ability to purchase a home are hesitating due to economic uncertainties and the high sales prices. It’s not that they think it’s a bad investment, but some Canadians don’t want the cost of homeownership to eat up the majority of their income.

Homeownership continues to be a sensitive topic and potentially an election issue. There’s even been some talk about the federal government reintroducing 30-year mortgages for first-time homebuyers, up from the current limit of 25 years. This would bring more buyers into the market but could also mean even greater levels of debt for Canadians.

Industries are hoping for changes to regulations in the future

Surely, anyone hoping to buy a home or anyone working within the real estate industry would love to see some changes to regulations to make it easier for Canadians to purchase homes. BILD wants OSFI to reconsider the stress test introduced last year, but that seems unlikely since the new rules are doing exactly what they were supposed to do – protect Canadians from taking on too much debt.

A report from Mortgage Professionals Canada suggested Ottawa tweak the stress test now as opposed to later. Their argument is that a borrower’s income is likely to increase by two per cent annually, so at the end of their five-year mortgage, they’d have 10 per cent more income.

Will Dunning, chief economist of Mortgage Professionals Canada, told the Toronto Star, ““If you think five years from now interest rates will be 2 points higher and incomes will be 10 points higher, you make the stress test 0.75 per cent today to replicate what will happen in five years.”

But while it’s possible that some Canadians do see that annual wage increase, there’s no supporting data that suggests that’s what a typical Canadian makes.

Finally, the Toronto Real Estate Board (TREB) is predicting home prices in the Toronto area are going to rise four per cent this year. This prediction is based on the fact that Toronto re-sale home prices were up 1.7 per cent year-over-year in January.

Though, one should note that TREB decided to focus on year-over-year data interestingly enough. If we look at month-to-month data, it may counter its four per cent increase prediction, as sales have declined steadily for the past four months.

Once the January sales data is released, we’ll have a clearer picture of what’s going on. For now, be aware that any change in government policy could change the outlook of real estate, so it’s always worth monitoring what’s going on.

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