While Canada’s housing market has long been a hot newsmaker, 2016 was especially tumultuous, chock full of surprises for markets, affordability, and mortgages – and it doesn’t appear the drama will subside in the new year. What should real estate buyers and sellers be wary of as January approaches? Check out our top six predictions for 2017 real estate!
INFOGRAPHIC: Game Changers – a Look at 2016 Real Estate
Toronto to be Toughest Market
Ontario’s largest city gets a bad rap for being “the centre of the universe” – and it’ll be the biggest source of buyer angst in the new year. Toronto real estate has officially surpassed Vancouver’s as the least affordable, as extremely low inventory and a rapidly growing population strain the market.
The city became 3% less affordable in Q3 2016 (to a total of 63.7%), according to measure cited in RBC’s Housing Trends and Affordability report – the tightest conditions seen since interest double digit interest rates in the early 90’s. Nationally, RBC’s affordability index is 44.3%.
This trend will only worsen next year, according to a forecast released by Re/Max. Prices will rise by another 8% to $783,926 in the GTA – but it won’t slow buyers down, said Cam Forbes, general manager of Re/Max Realtron Realty. “Poor and still-rapidly deteriorating affordability (especially for detached homes) does not appear to be a significant impediment for buyers at this stage,” he stated to the Toronto Star.
A severe shortage of land for new construction also has a big impact on prices says the Building and Land Development Association (BILD), which reports new low-rise construction prices rose 27% to an average of $1.24 million this year. “The industry is building to government policy and building far fewer low-rise homes, especially detached single-family homes, but demand has not dropped with supply, so prices continue to rise,” stated BILD’s Vice President Michelle Noble.
Related Read: Townhouses – The New Real Estate Reality in Toronto
Condos to Heat Up
It seems just a few short years ago that pundits warned too many condos were being built in Canada’s cities – but it became clear this year there’s enough demand, as buyers are increasingly priced out of low-rise options.
Sales of condos accounted for 60% of all 2016 GTA sales, and up 24% from last year’s numbers, according to BILD.
“High-rise inventories have been on a downward path over the last three years,” said Executive Vice President Patricia Arsenault. “Total available inventory in November was the lowest November level we have seen since we first started to track this data in 2000.”
The average price of new condos in the GTA reached $493,137, a 10% increase from a year ago.
Vancouver Market to Fall Further
While the west coast city has been the hottest Canadian market for years, it experienced major deceleration in 2016. While there were already signs of softening demand, a surprise 15% tax for foreign buyers led to dramatic sales upheaval. The tax was introduced on the August long weekend, and caused sales to plunge 26% by September, reports the Real Estate Board of Greater Vancouver.
“Sales have been trending downward in Metro Vancouver for a few months. The new foreign buyer tax appears to have added to this trend by reducing foreign buyer activity and causing some uncertainty amongst local home buyers and sellers,” REBGV stated.
By December, sales had dipped 20.2% year over year, according to the British Columbia Real Estate Association, with sales dollar volume down 25.2%.
Royal LePage says this decline will continue into the new year – by as much as double digits – for both sales and prices. “Home prices had gotten so out of whack with the growth in the underlying wages and salaries that there had to be a correction – and it’ll happen in 2017,” said CEO Phil Soper to Bloomberg. But don’t expect prices to become much cheaper – Soper points out that even should they tumble 10%, they’ll only be at March 2016 levels – still 20 times the average income in the region.
Recovery in Alberta’s Market
The wild rose province has endured several years of economic hardship, as the downturn in the oil industry led in thousands of layoffs and slashed corporate budgets. As a result, the housing market in Alberta’s largest cities have transitioned from seller to buyer conditions; home prices softened 4% in Calgary between 2015 – 2016. However, CREA is optimistic about the 2017 market, calling for a 3.5% increase in sales and for prices to dip just 0.8%.
“The forecast rise in Alberta sales in 2017 mostly reflects slow sales activity in the first quarter of 2016, a repeat of which is not expected,” CREA reports, with Chief Economist Gregory Klump adding, “What we’ve been seeing is that listings have really been held in check and there isn’t that oversupply situation that would lead to the kind of price declines that are associated with a massive oversupply of homes in the face of weak demand.”
Fixed Mortgage Rates to Rise
Despite lingering at record lows for the last five years, fixed mortgage rates became slightly less competitive in 2016, with further hikes to come next year.
Bond yields, which banks use to set their fixed lending prices, will rise ever higher in 2017. The U.S. economy is partly to blame; as president-elect Donald Trump introduces his spending plans, inflation is anticipated to spike, and will spur the U.S. Federal Reserve to hike its trend-setting interest rate. As bond investors detest rising inflation and rates – they negatively impact the risk level and value of their investments – they’ll continue to sell off and push yields higher.
Another reason is home-grown; new rules impacting how Canadian lenders insure and sell their mortgage portfolios have come into effect, limiting their funding options. Many have already priced a premium into their fixed rates to offset these losses, and will continue to do so throughout 2017.
A proposal to have the banks shoulder more risk for defaulting mortgages could also cramp their pocketbooks. While the plan is currently being reviewed by the industry, lenders may be on the hook for 5 – 10% of costs for mortgages that fall through in 2017, a change that will surely be reflected in consumer rates.
Variable Mortgage Rates to Become More Popular
While the variable cost of borrowing – which is based on the rate set by the Bank of Canada – has been historically low, the spread between fixed and variable rates has been narrow enough in recent years that borrowers have preferred to lock in. That will change in 2017, as fixed rates will be priced less competitively.
It’s also anticipated the Bank of Canada will keep the variable cost of borrowing super low (it’s currently at 0.5%, where it has remained since July 2015) and possibly cut it even further. While the BoC has said in the past that a lower rate could lead to more high-risk debt, it believes the government’s new mortgage rules will effectively offset borrower demand.
And, while the BoC has traditionally followed in the footsteps of the U.S. Federal Reserve, that won’t be the case this time around – in November, Deputy Governor Timothy Lane stated, “We are free to adjust our policy interest rate in the context of Canadian economic conditions, and, in particular we do not need to move in step with the Federal Reserve.”