Home sales and price growth are weakening in most Canadian real estate markets, but national averages do not always tell the whole story. Tremendously inflated prices in cities like Vancouver and Toronto have largely overshadowed housing trends in smaller markets.
- Canada’s individual real estate markets are experiencing different housing trends
- Condos are appreciating in price faster than any other housing type
- A new mortgage stress test and rising interest rates are putting pressure on buyers
- Price growth is cooling down to more sustainable levels
Divergent Markets – The difference in price growth between some of Canada’s most divergent real estate markets is pronounced. The national home price average increased 0.4% in December month-over-month, but declined 1.42% in Oakville-Milton, Ontario.
Long-term trends show similar differences between national and local trends. In the past five years, prices in Oakville-Milton are up 58%, while Ottawa prices are up 12.54%. Saskatoon prices posted contrasting results with declines of 3.18% over the past five years.
Condos are King – Condos have exploded in popularity because of limited housing options in Canada’s hottest markets – namely Vancouver and Toronto. Most buyers in these booming markets are turning to condos in the wake of limited supply and worsening affordability problems.
Condo prices are appreciating faster than any other housing type, growing 14.3% year-over-year to $420,823 in the fourth quarter of 2017. The average home price in Canada rose 10.8% to $626,042 in the same period, according to Royal LePage’s National House Price Composite.
Mortgage Regulation – The Canadian government was forced in the past year to take action in response to overheated markets like Vancouver, which had a median home sale price of over $1.1 million.
The government introduced an expanded mortgage stress test that took effect at the beginning of the year. The test requires borrowers putting down 20% or more to qualify at a rate 200 base points higher than their mortgage rate. Today’s borrowers must prove they qualify for a mortgage at the Bank of Canada’s five-year benchmark rate of 4.99%.
Interest Rates – Low mortgage rates in Canada have tricked buyers into thinking they can afford to live in some of the priciest markets. Vancouver, for example, had a median home sale price of about $1,108,345 but an average household income of only $63,944.
Mortgage experts are certain that interest rates will steadily rise over the next few years to help put a cap on overambitious consumer habits. The Bank of Canada raised its overnight rate target to 1.25% and Canada’s big banks increased their benchmark five-year mortgage rates two weeks ago.
According to Canada Mortgage and Housing Corp., mortgage rates will gradually rise through 2019. The national housing agency claims five-year rates should lie between 4.9% and 5.7% in 2018 and 5.2% and 6.2% in 2019.
Sustainable Growth – The anticipated cooling effects on home sales and price growth will put many of Canada’s hottest markets on a path towards sustainable growth.
According to ReMax’s forecast, price growth in the Greater Toronto Area will fall flat this year, compared to an exorbitant 14% growth last year. Price growth in Fraser Valley will come in at around 5%, compared to 11% last year. Prices in Victoria will decrease 5%, compared to 11% growth last year.
“This appreciation is not something that can be sustained, and we are seeing fewer affordable options for detached houses, which continues to drive buyers further west. We expect to see a wait-and-see response in the early part of the year,” said Christopher Alexander, executive vice-president and regional director at ReMax Integra Ontario-Atlantic.