As mentioned by the author of this article, for homeowners the great, big, unanswered question is whether or not the Canadian real estate market will finally crash in 2017. Turns out, all reports and analysis lean towards a flattening out of property prices in most Canadian markets, with some areas of the country experiencing a decline in both sales activity and prices, as other areas continue to experience price gains, albeit at a much slower pace than we’ve seen in recent years said Yury Stepanchenko.
Keep in mind, housing markets are not as prone to bubbles, and to burst bubbles, when compared to other financial markets. This is, in part, due to the large transaction and carrying costs associated with owning real property. However, over the last few decades, the combination of very low interest rates and the regulations that allow easier access to mortgage financing has prompted more borrowers to enter the real estate market and this has put increased pressure on demand. For a crash to occur, there would need to a sudden drop in demand, such as a fairly quick rise in interest rates or significant a tightening of credit standards.
- Expect sales activity in 2017 to decline, for the most part:
According to the Canadian Real Estate Association (CREA), national sales are forecast to drop in 2017 by 3.3%, compared to the previous year. In its annual year-end report, CREA states: “Transactions in B.C. and Ontario are anticipated to remain strong but fall short of this year’s record levels due to deteriorating affordability, an ongoing shortage of affordably priced listings for single family homes and tightened mortgage regulations.”
For instance, the reduction in home sales in PEI is due, primarily, to an unusually strong 2016 selling season, that “is not expected to reoccur in 2017,” CREA explains in its year-end report. Still, the province can still expect to reap the rewards of a weakened Canadian loonie.
But not all markets should expect price drops in 2017. According to CREA predications, home sales will rise in Alberta and Quebec primarily because both markets experienced a slowdown in 2016.
- Average prices in 2017: Toronto and Golden Horseshoe:
Despite a predicted decline in sales activity for 2017, most of Ontario’s housing markets won’t experience price declines this year. This is particularly true for homes located in the Greater Toronto Area and in the larger Ontario region known as the Golden Horseshoe. This is due, primarily, to a pronounced lack of supply of housing stock, particularly for low-density, single-family detached homes.
This lack of supply means that seller’s are sitting pretty in a very heated seller’s market, which is measured by the months of inventory (ROI) ratio. The basic rule of thumb is that an ROI that’s below four months (120 days) is solidly in seller’s territory; by the end of 2016, the GTA had 36 days of inventory.
This obvious lack of inventory certainly had an impact on housing prices. Between November 2015 and November 2016, the average selling price of a GTA home rose to $776,684 up 22.7% on a year-over-year basis.
As a result, anyone in the market to sell a home in the GTA or in the surrounding areas, including Niagara, Hamilton, Halton, Peel, New York and Durham, can continue to expect strong demand. This should translate into higher sale prices and fewer days on the market.
- Average prices in 2017: British Columbia:
Probably the largest regional drop in both sales activity and prices will be in British Columbia. Given how 2016 played out, with significant drops in both the number of transactions and sale prices.
“This largely reflects an anticipated decline in single-family home sales activity at the higher end of the market particularly in the Lower Mainland,” explains CREA’s Chief Economist, Gregory Klump.
- Average prices in 2017: Rest of Canada:
Meanwhile, an ample supply of listings relative to demand is anticipated to keep price gains in check in other provinces, although sales have begun to draw down inventories in provinces where supply had been elevated in recent years.
The biggest factor in the predicted 2017 slowdown are the tighter mortgage regulations that were introduced in 2016. “Tightened regulations are expected to reduce the number of first-time buyers who qualify for mortgage financing, particularly in pricier markets, where there is a severe shortage of lower-priced listings.”
Another factor is that mortgage rates are expected to rise in 2017. While the increase is expected to be slow to moderate, this increase due to increased capital cost requirements for lenders and the possibility of inflationary economic policy under President Donald Trump will also reduce the number of home buyers in the Canadian marketplace.
- Check your mortgage terms:
Still, as a homeowner, you need to make sure you’re well positioned to weather the uncertainty of the next few years. If you have stable household income, 2017 will probably let you ride out continued low variable-mortgage rates. However, if you’re in the market to renew, consider locking in. As of mid December the spread between five-year fixed and five-year variable rates was negligible, at best. For example, Van City was offering a five-year variable at 2.59%, while its five-year fixed was 10 basis higher at 2.69%. That’s a small premium to pay for peace of mind.
Still, with mortgage rates poised to rise, this might be the year to tackle your biggest debt. For tips on how to pay off your mortgage faster, read Crush your mortgage (although, there are some valid arguments against paying down your mortgage sooner while rates are still low).
- Impact on home buyers:
The biggest factor in the predicted 2017 slowdown are the tighter mortgage regulations that were introduced in 2016. “Tightened regulations are expected to reduce the number of first-time buyers who qualify for mortgage financing, particularly in pricier markets, where there is a severe shortage of lower-priced listings,” explained Gregory Klump, chief economist for the Canadian Real Estate Association (CREA).
Another possible factor is the potential for mortgage rates to rise in 2017. While the increase is expected to be slow to moderate, this increase—due to increased capital cost requirements for lenders and the possibility of inflationary economic policy under President Donald Trump—will also reduce the number of home buyers in the Canadian marketplace. This combined with a nation-wide rebalancing of housing markets means that buyers will have more opportunity in most markets across Canada. Even in Ontario and B.C., where CREA has predicted that national sales will remain strong, sales will fall short of the record levels set in 2015 and 2016, due to deteriorating affordability, an ongoing shortage of single family home listings and tightened mortgage regulations.
- Spring-time buying rush:
Still, no one should be surprised if there’s a spike in sales come the spring. “Historically, the spring market is the busiest house buying season and prices can spike as much as 10%,” explained Laurin Jeffrey, real estate agent with Century 21 Regal Realty.
While a spring rush, combined with continued low inventory, could push prices up there are other factors that may remove demand pressures. For instance, qualifying for a mortgage based on higher, posted rates may knock a portion of buyers out of the market, or shift them to areas or housing types that aren’t in such high demand. According to Genworth Canada, the largest private mortgage insurance provider, approximately one-third of first-time homebuyers would no longer qualify for their current homes if they were forced to re-qualify under these new mortgage rules.
- Top tips for real estate investors in 2017:
Despite all the advice about not buying a residential property for income purposes, many still do. Rental markets are still tight in the hottest real estate markets, with vacancy rates still hovering in the mid-1% range. As such, buying property to rent out makes sense, as long as you have a large enough down payment to ensure that rent covers expenses.
For the best value, consider multi-unit rental properties—like duplexes, triplexes, and beyond. This type of rental stock is still far more favorable than single-unit rentals, such as condos, as you can spread out the risk of rental loss across multiple units. But it also means paying a premium on this type of income property. Not only do you compete against other investors, but also against families and first-time buyers who are trying to find a way into hot property markets.
As in the past, anyone thinking of buying an investment property should first start with a financial plan and a budget. Then work the numbers. If you can’t withstand a loss—say the roof collapses or you need to hire a lawyer to legally evict a tenant—then you shouldn’t be buying an investment property Said Yury Stepanchenko.
(Original Source: http://www.moneysense.ca/)