Sooner
or later mortgage rates will rise and house prices will start to
moderate. Why this is the year the market will finally start to turn.
Buy a house. Don’t buy a house. Soft landing. Crash landing. As we
start the new year, the question on everyone’s mind is: What can we
expect from Canada’s housing market?
Once
again, experts agree that housing affordability is stretched,
historically low interest rates will rise, and housing prices will drop.
Rewind 365 days and you could be reading a forecast for 2014. But this
time the experts agree: prices really will fall and it’s got everything
to do with the recovery of the global economy.
Now,
if the global economy were a ballgame we wouldn’t be in the World
Series. Oil prices are depressed and Europe is still struggling with its
credit crunch. But things are slowly improving in the U.S. and within
Canada, and the important teams are still in the game: our employment
rate is stable, oil prices are not (yet) low enough to cause real
concern, and exports have picked up as the value of our dollar has
dropped. All this leads most economists to believe we’ll see slightly
higher bond and mortgage rates and a nation-wide cooling of the housing
market over the next couple of years.
Robert
Hogue, senior economist with RBC Bank, says he believes the coming year
will be “a moderating phase for the market with a soft landing in
2016.” Hogue predicts national home prices will actually rise 1% or
maybe 1.5% in 2015, as buyers race to get in the market before mortgage
rates increase, after which prices will fall later in the year. “It’s
one of the reasons why 2014 was such a strong year.”
But
he cautions home owners: “Canada’s real estate market really is a
multi-headed beast. It’s essentially very strong in Toronto, Vancouver
and Calgary, but it’s balanced or soft in the majority of other
markets.” As such, he predicts we’ll see a cooling of the three biggest
markets by the end of the year in response to small mortgage rate hikes
starting mid-year.
Now,
if the prime rate were to climb from its current 3% level to 5% or 6%
over the next year or two, many Canadians could find themselves in deep
trouble, says Hogue. But he isn’t sure we’ll see rates shooting up that
fast any time soon. Until recently, analysts and policy makers
considered 5% to be the neutral or natural interest rate. It was the
rate that allowed full employment, a stable inflation rate, and a
sustainable growing economy. But Hogue, along with economists from
Morgan Stanley and analysts from the C.D. Howe Institute, believe that
the “new neutral rate” has actually dropped.
The
primary reason is the impact baby boomers continue to have on the
national economy. As boomers continue to age and leave the workforce,
Canada can expect a slowing of the labour market, which will depress
productivity growth, limit the economy, and suppress potential
inflation, explains Hogue. “If the new normal is markedly below what
we’re used to, then we won’t see as much downward pressure on housing
prices,” he says.
The
impact of demographics doesn’t stop there. According to a new report by
Benjamin Tal, deputy chief economist with CIBC, analysts have been
seriously underestimating the number of new immigrants in Canada. New
immigrants account for 70% of the country’s population growth and about
half are between the ages of 25 and 44—the key demographic that leads to
household formations. According to Tal the under-estimated increase in
the number of home-buying immigrants in Canada will help to offset a
slowing economy, created by the boomer generation. “Immigration, itself,
won’t be able to change this trajectory, but it will help to offset
it,” explains Tal.
But
David Madani from Capital Economics isn’t convinced. “Every good
economist knows that immigration always fluctuates and it’s never
prevented a housing cycle in the past.” He’s also not convinced that
builders are out of the weeds when it comes to supply and demand. While
he agrees that absorption rates are close to historical long-term
averages, he’s confident that the market will suffer. “There are too
many one-bedroom condo units being built when demand shows a need for
family accommodation.”
So
what’s a regular home buyer to do? The best advice is prepare for the
worst, but if you’re ready to jump in and you can afford it, waiting for
prices to fall might not be the best idea. Ted Rechtshaffen, president
and CEO at TriDelta Financial, advises against trying to time the market
in general. “It’s not about prices or the mortgage rate, it’s whether
you can truly afford to own the home.” This means calculating whether or
not you could still afford your monthly payments even if mortgage rates
increased to 4% or 5% a few years from now. It also means deciding
whether or not you can stomach a housing price drop. While many
economists are predicting a 10% drop, the correction could be as great
as 30% in some Canadian markets.
Of
course, your home is more then equity and capital. It’s the place you
spend time with friends and family, and the place you build memories.
“Life and lifestyle is just as important,” says Rechtshaffen, so as long
as you can afford your payments, “don’t be too concerned about the
correction.” - by Romana King
