First National Financial LP

Market Memo: Looking ahead

  • First National Financial LP

Canada’s housing and real estate markets experienced a significant cooling in 2018.  Interventions by various levels of government and rising interest rates combined to slow down sales and price growth.  So far the bubble has not burst and there has not been a crash.

What’s next

Generally, market watchers see the current trends continuing through 2019 and beyond.

The Canadian Real Estate Association is calling for a modest 2% increase in sales with prices rising in sync with inflation at about 2.7%.  CREA recognizes there will be regional variations: British Columbia and Ontario will likely come in slightly above the national averages while the energy dependent provinces – Alberta, Saskatchewan and Newfoundland and Labrador – will be flat or a little lower than the national averages.

Moody’s Analytics, the independent research arm of the rating agency, is also calling for stability in the Canadian market.  It does not see any major, short-term corrections for at least the next 5 years.  Moody’s is optimistic about affordability saying it expects income growth will keep pace with, or exceed, price growth.  Given that wage growth has been slowing in Canada this prediction may be a little too bullish.

Interest rates will be key

Interest rates will remain a key factor in the market.  Moody’s and the big banks are calling for further increases of another full percentage point or more by the end of 2019.  Beyond housing and real estate that will put the squeeze on consumer spending as heavily indebted Canadian households are forced to channel more money into repayments.  Right now household debt in Canada is equal to the national GDP.

Some risks

That debt does set up the potential for some downside risk.  If housing prices were to plunge for some unexpected reason it could trigger a recession, but that is considered very unlikely.

Moody’s warns of another possible risk: the B-20, mortgage stress test.  The tougher rules (designed to rein-in the markets in Toronto and Vancouver) when coupled with higher interest rates could have an unnecessary cooling effect in Atlantic Canada and on the Prairies.  Moody’s says that could lead to “a full house-price correction and a perceptible drop in sales in these regions.”  The researchers say reduced purchase demand could spread out from the real estate sector to land development and construction businesses.

Moody’s also points out that the stress test could lead to a serious shift away from mainline banks.  Growing numbers of borrowers are already turning to non-federally regulated and private lenders in an effort to get around the B-20 restrictions.

Soft landing

So far though it appears the market will have the, desired, soft landing and stability will continue.  Inflation remains in check at about 2%; unemployment remains below 6%; the economy continues to generate jobs, and there is virtually no debate that interest rates will continue to rise.  But recent reports from the Bank of Canada suggest those hikes will likely be fewer and smaller than previously expected.  That could ease the burden for home buyers and people carrying debt.