Canada’s housing market correction isn’t over, analysts warn and facts

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Canada’s housing market correction isn’t over, analysts warn and facts

Exterior of old semidetached houses . Sunny winter morning on urban city street with snow.

Canada’s real estate market will likely see further correction in 2019, as fears of higher interest rates and stress tests continue to weigh on the sector, according to analysts.

After a period of double-digit growth in key markets over the past few years, Canada’s real estate sector came back down to earth in 2018, broadsided by tighter rules. Home sales activity was down 12.6 per cent year-on-year in November, below the 10-year average for the month, according to the Canadian Real Estate Association.

CREA expects home sales across the country to decline to the lowest point in nine years in 2019. “We are in a broad-based real estate correction in 2018, and we think that it will take the year to work its way free of the overshooting that occurred in 2014 through 2017,” said Phil Soper, president of Royal LePage.

A key factor driving activity next year would be interest rates, which, until recently, were expected to edge higher as Bank of Canada looked to “normalize rates.”

The bank raised the benchmark interest rate to 1.5 per cent in July, but since then appears to have reined in its enthusiasm amid a slowing economic environment.

The bank has also argued the worst in the housing market is over and markets are stabilizing.

“But, from our vantage point, it’s difficult to agree,” wrote CIBC Capital Markets analysts Benjamin Tal and Royce Mendes in a note to clients. “The central bank’s own workhorse model says it takes six quarters before the full impact of any rate hike is felt in the economy. So it’s concerning for the outlook then, that only five quarters since the first move of this cycle, let alone subsequent rate increases, we’re already seeing a slowdown in housing-related indicators.”

A rate pause would come as a relief to mortgage buyers at a time when Canadians’ household debt to disposable income is at a record level of 170 per cent, Canada Mortgage and Housing Corporation’s estimates show.

“In the most expensive cities — Vancouver and Toronto — a quarter of one percentage point on an average house does become pretty significant,” said Soper.

Another key driver in 2019 will be the looming shadow of Bill B-20, imposed in early 2018 by the Office of the Superintendent of Financial Institutions. The “stress test” required banks to assess people’s ability to pay assuming interests were either two percent higher, or greater than the five-year benchmark rate published by the Bank of Canada. Royal LePage and PricewaterhouseCoopers predict the stress test will continue to weigh on the markets in 2019.

The squeeze on millennials comes as a large demographic in the age group look to buy their first house. This will likely strain already-saturated markets in Toronto and Vancouver. In the Greater Toronto Area alone, 700,000 millennials will be in the market for a home in the next decade, according to a study sponsored by the Ontario Real Estate Association.

But cutting off young buyers could have sequential effects next year, says Elton Ash, RE/MAX Regional EVP for Western Canada.

“When you affect these first-time home buyers, they are the initial dominos of what drives the market. Because as an existing home owner, if you don’t have anyone buying your house, you can’t move up or move over.”

Here’s how Canada’s four real estate markets are expected to perform in 2019:


Real Estate Brokerages expects the GTA market to make modest gains, with home prices rising 1.3 percent, while Real Estate Brokerages are forecasting a two percent gain.

Between 2017 and 2018, home sales dropped by 16 percent, from around 80,000 to less than 68,000. With prices still at elevated levels, Real Estate Brokerages estimates this number will continue to drop next year. However, Alexander says there is no shortage of demand — immigration to the GTA will continue to have an impact on the market.