Canadian Housing Market Anticipating steady year in 2016

Daily Brew
December 30, 2015

Several experts are predicting a steady year for the overall housing market in Canada in 2016, thanks to low interest rates and especially strong markets in Toronto and Vancouver.

The national average sale price is forecast to reach $448,700 in 2016, up 1.4 per cent from 2015, the Canadian Real Estate Association (CREA) says. That’s more moderate than the 8.4 per cent increase seen this year.

But the key 2016 housing story is one of regional variations — and some regions of the country are going to come out in much better shape than others.

“It’s kind of like asking what’s the overall weather for Canada. It really depends on where you are,” Gregory Klump, chief economist for the Canadian Real Estate Association, tells Yahoo Canada News.

“The biggest thing to bear in mind is that when you hear about the Canadian housing market, you have to ask yourself where,” Klump says.

Looking at the national picture, things look positive after a year of rising housing prices. The average price of a house in Canada was $456,186 in November 2015, according to CREA, up 10.2 per cent from November 2014.

But markets vary considerably across the country. For example:

  • In British Columbia, the average price was $668,317 in November 2015, up 16.3 per cent from the same month last year.
  • In Alberta, the average price was $385,430, down 5.3 per cent.
  • Average prices only went up 1.7 per cent in Quebec to $283.560.
  • And average prices soared in the Yukon and Northwest Territories, to $343,942 (41.7 per cent) and $423,788 (106.2 per cent), respectively.

And the market trends seen in different parts of the country in 2015 give a good idea of what 2016 will look like.

“Regional variations we’ve been seeing this year will persist into next year,” Klump says.

Regional winners and losers

Strong demand, land shortages and limited listings in some parts of the country will continue into the new year, Klump says.

“It’s no surprise that you’ve got tight inventories relative to a high level of demand,” he says, “and for that reason you’re seeing price increases in the Lower Mainland [in B.C.] and Toronto.”

The CREA’s most recent forecast, released Dec. 15, improved the already-positive 2015 outlook for housing sales and average prices in Ontario and B.C. because the market continued to strengthen.

Markets in those two provinces are expected to moderate somewhat in 2016, the CREA report says, but Ontario is still expected to see price gains of 2.9 per cent next year and B.C. of about two per cent.

But the continued drop in oil prices resulted in some pessimism about 2016 housing markets in resource-producing markets around Canada.

“Prospects in 2016 for a rebound in oil prices — and by extension, housing markets in oil producing provinces — have dimmed,” the CREA forecast says. “Accordingly, forecast for sales activity in Alberta has been revised lower, as have forecast average prices in Alberta, Saskatchewan and Newfoundland and Labrador.”

The role of consumer confidence on the housing market is hard to overstate, Klump says.

“It’s really important to bear in mind concerns about the labour market on buyer psychology itself,” he says.

Those concerns are high in resource-dependent markets like Alberta and Newfoundland and Labrador, due in large part to the downturn in the oil industry and resulting job losses.

“What happens in 2016 is largely a function of what happens with oil prices,” Robert McLister, founder of RateSpy.com, tells Yahoo Canada News. “If oil producing provinces stop investing, that affects everyone in Canada that is involved [in that industry]. It’s such an intertwined phenomenon.”

But while some markets are negatively affected by low crude prices, others have been helped by that and the weak dollar, Klump says. Manufacturing in Manitoba and Southern Ontario is on the upswing, he points out. And tourism-heavy markets are already benefitting from a low loonie that keeps Canadians travelling at home and brings Americans here. Prince Edward Island is expected to see housing price increases of 1.5 per cent in 2016, for example.

“It puts those regional variations in the prospective housing market in context,” Klump says.

Tempering hot markets

Low interest rates are also buoying home sales, particularly for first-time buyers. All indications are that interest rates will stay down for at least the majority of 2016, and perhaps even into 2017. Also, all trends right now point to inflation holding at two per cent or lower, McLister says, which will also help keep rates low.

But even if interest rates do rise slightly, they still won’t be much of a deterrent for most homebuyers simply because they are so low right now.

“TD said that a half-point increase in rates shaves 10-15 per cent in home sales,” McLister says. “To a degree, the inverse of that is true.”

Even a small drop in rates, or a lack of increase, should benefit home sales.

But Ottawa’s recent change to mortgage insurance regulations, which means that the Canada Mortgage and Housing Corp. (CMHC) will require a larger minimum down payment for higher-priced homes, may have a more notable effect, experts say. The federal government announced the rule change in December, and in 2016 the CMHC will require a minimum 10 per cent down payment on the portion of mortgages it insures over $500,000, instead of five per cent across the board.

The regulatory change is meant to temper the hot markets in Toronto and Vancouver, McLister says. But the reality is that it may have only a minimal effect there.

“You’re barely going to put a dent in home sales,” he says about the effect of the rule change on housing sales in those two markets. “For single family homes, people are lining up to buy those. In Toronto, given that you have multiple offers on every other house it’s going to have very minimal impact.”

CIBC predicted that the changes would only affect sales by 4 per cent nationwide, McLister says.

However, the regulatory change could have an effect on smaller markets that are high-priced but drifting lower. Markets like Regina, Calgary and Fort McMurray, which have weakened with the decline in the resource sector, could be the “unintended collateral damage” of the change, Klump says.

“There’s a lot more to Canada than just Toronto and Vancouver, which were the target of those regulations,” he says.

And even though the new rule from Ottawa doesn’t come into effect until 2016, they are already having an effect, McLister says.

“Probably the most under reported part of it is that they’re raising the cost of securitization and they’re also looking at increasing the capital requirements,” he says. “It’s going to raise rates a minimum of five to 10 basis points, and in fact it’s already had an effect.”

Some lenders are already pricing these costs into their mortgage rates, McLister says.

“There’s really nothing that points to rate increases, so that should give people comfort,” he says. “Arguably, for a well-qualified borrower now is as good a time as any in history to get a shorter-term mortgage.”

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