Back in December 2018, the Bank of Canada held the key interest rate at 1.75%, following a weaker outlook for Canadian economic growth in 2019. With much of the emphasis on the energy sector and North American trade, the question for many of you is likely how will things play out for the real estate market?
Mortgage refinancing may impact real estate in 2019
In an interview with the Financial Post, David Rosenberg, Chief Economist for Gluskin Sheff & Associates said his big concern is that half of the mortgage debt in the household sector is going to refinance in 2019-2020 at much higher interest rates. Depending on how far the BoC key interest rate increases, this period of refinancing could impact the consumer activity and depress economic growth.
The interest rate hikes of 2017 are still being absorbed in the economy at a consumer level. When rates rise, the cost of debt rises, and consumer activity slows down. Watch the interview here.
At the start of the fall, we had the chance to chat with Gregory Klump, Chief Economist at the Canadian Real Estate Association (CREA). His insight gave us an interesting perspective on real estate in 2019. What are we seeing now, and what might we see tomorrow?
First off, when talking about real estate it is important to think local. There really isn’t any such thing as a Canadian real estate market when talking about buyers and sellers. All real estate is local.
At the time of our chat in October 2018, Toronto was seeing local real estate markets that were mostly balanced, with pockets of sellers’ markets. A major price correction is unlikely to occur in such market conditions. In a strict buyer’s market, however, an abundance of inventory can perhaps bring down prices. This year is going to see the completion of more condo projects, which will hopefully help moderate the real estate market. Until then, with the housing supply in Toronto continuing to fall below demand levels, prices are unlikely come down drastically anytime soon.
Toronto needs more housing supply
Without question, the GTA needs more housing supply inventory. Doug Ford’s removal of rent control on all new apartment units was addressing the housing-supply issue, even if the approach is counter-intuitive to a crisis of rising rental rates.
According to Urbanation, “The strength in rent growth caused the number of units leased for less than $1,800 per month in Q3-2018 to drop by 65% compared to Q3-2017. At the same time, the number units renting for more than $2,500 per month surged by 43%.”
Representatives from Tridel, Menkes, and Diamond Kilmer Developments agreed that housing-supply constraints in Toronto are a problem and that the condo market is entering a slower period in 2019. “Costs have increased across, including steel, due to tariffs, labour, municipal charges and land.” Finance and red-tape issues caused the cancellation of 15 buildings and 4,500 units in 2018. Prices may level out in the short-term, but in the long run prices will continue to rise.
In the resale market, the issue of “sitting-duck” sellers may also be contributing to the supply constraints. Sellers who are waiting to sell a house or condo, but then hoping to buy a condo in Toronto after, are actually doing themselves a disservice because they will be buying back into a higher priced market. In these market conditions, if you want to sell and then buy, you should do it sooner than later.
An alternative to selling in this marketplace is renovation. If you are looking for condos for sale in Toronto because of new or exciting features you desire, it may be more affordable to renovate your current home to include those features.
What about talks of a 2019 recession?
Barring an international market crisis, the real estate industry in Canada is expected to stay strong in 2019. That’s because the Canadian economy is reasonably strong, and there are no immediate catalysts of a crash on the horizon.
Typically, there are three main catalysts for an economic recession:
1) Highly-increased and sustained interest rates
2) Declines in employment
3) Over-tightening of regulation
Much like in 2008, it would require external factors for Canada to be dragged into an economic decline. There hasn’t been a truly home-grown recession since the 1980s when interest rates rose drastically.
The bank of Canada held the overnight rate at 1.75% in December 2018, and they are expected to raise interest rates marginally and with caution over consumer debt.
International issues and the decline in national employment could cause a recession, but in that case real estate would be collateral damage within a much greater problem.
When it comes to increased regulations, the Office of the Superintendent of Financial Institutions (OFSI) and the Canada Mortgage and Housing Corporation (CMHC) are tightening the rules around mortgage loans, but they are not “over” tightening regulations. They are playing it cautiously with a mind for potential future problems, ensuring they will be able to manage such future situations.
The OFSI is determined that more work is needed regarding home-equity and income verification to further cool the marketplace. Still, they hold that Canada’s financial situation is resilient.