Location, location, location: Why our national housing market is a myth
Haider-Moranis Bulletin: For Canadian homebuyers, the only numbers that matter are local
Canada’s housing affordability:
For some, the real estate market is “out of its slump.” For others it is simply “stabilizing.” Others still see “no signs of cooling.”
The varying pronouncements about Canada’s housing markets in mid-July suggest that there isn’t per se a single housing market, but instead a collection of local markets where prices and sale volumes adjust to local variations in housing demand and supply, sometimes in response to institutional interventions.
The latest release of the monthly housing statistics by the Canadian Real Estate Association (CREA) suggests that a “national” Canada-wide lens on housing markets shows a picture that is necessarily not reflective of any local housing market. Whereas the national housing market is the sum of its parts, it’s the parts that matter because consumers do not see or experience the national averages. Housing prices and sales volumes are inherently relevant only at local levels. Whereas month-over-month comparisons are interesting, given the cyclical nature of housing markets, year-over-year comparisons are more meaningful. Hence, the 4.1 per cent increase in sales volume observed in June 2018 over May might suggest an upswing in national housing markets. Yet, it is obfuscating the larger underlying market dynamic: A comparison with June 2017 reveals a decline of 6.6 per cent in national housing sales.
But the preceding is just a version of the reality as these numbers are seasonally adjusted to present a picture of housing markets after controlling for the ever-present seasonal variations. The raw sales numbers — CREA calls them the “actual activity” — show that the national housing sale volumes were down 12 per cent in June 2018 relative to the same month last year. Housing sales in June were also 6.3 per cent lower than they were in May 2018.
Right there, even at the national level, two contrasting pictures emerge of sales, one suggesting that the sales were up (seasonally adjusted) and the other suggesting sales were down (actual sales) from May to June.
So, here’s the housing version of the glass half full riddle: were the markets up or down in June?
Barb Sukkau, CREA’s president, believes in the seasonally adjusted numbers as she reflected on the impact of stress tests, which increased the mortgage qualification threshold in January 2018, on housing markets. “The increase in June (sales) suggest that its impact may be starting to lift,” Sukkau said.
But when it comes to actual housing prices, signs of a recovery are not visible at the national level where the actual average housing price in June 2018 at $496,000 was 1.3 per cent lower than the average price a year ago. And this decline is before the prices are adjusted for inflation. Compared to May 2018, average housing prices barely rose by 0.3 per cent.
Hardly a hot market, at least at the national level.
CREA also publishes a home price index (HPI) that accounts for seasonal changes over time. Also, it accounts for the difference in housing types and sizes that may be active at one point in time but not the other. CREA’s HPI thus presents the change in housing prices of similar or identical housing stock over time. The HPI for June 2018 also presents a conflicting picture where the index was modestly up by 0.9 per cent since June 2017 but down by 0.13 per cent relative to May 2018.
While the recent returns in housing markets are not stellar, a long-term view would suggest that housing markets in Canada have performed well where the HPI has been up 46 per cent since June 2013.
Hiding under the national averages are the peaks and troughs of local housing markets. Urban markets in B.C. report strong gains in prices year-over-year, whereas markets in Saskatchewan and the greater Toronto area report declines. The HPI in greater Vancouver is up by 9.5 per cent over the past year. The strongest gains though came in the Fraser Valley, with an 18.4 per cent increase over the past 12 months. Prices in Vancouver Island followed with a 16.5 per cent increase. Meanwhile, the index was down by 4.8 per cent in Toronto, Canada’s largest housing market. Contrasting the extremes are the restrained markets in Montreal and Ottawa where the HPI has risen by 6.5 and 7.9 per cent respectively.
So, is the glass half full or half empty? It depends.
Housing markets across Canada continuously adjust to local dynamics and nationwide regulatory changes to mortgage finance. While the short-term monthly dynamics might be a bit jittery, the long-term view of housing markets reveals their resilience and suggests the regulatory blues will eventually be shaken off, and the steady upward stride will continue.Murtaza Haider is an associate professor at Ryerson University. Stephen Moranis is a real estate industry veteran.
Are you ready for 2018?
8 real estate market trends to watch for in 2018
The rise of the tech-disrupter, the return of the 30-year-mortgage and a roller-coaster mortgage rate ride. These are just a few of the trends to watch for in Canada's real estate market this year
There’s an old newspaper editor joke: What do you do when you cover the same event year after year? Slap a new headline on an old story and run with it. Real estate in Canada is beginning to feel a bit like the butt-end of this joke. Every year there are pronouncements that this is the year when the market will finally… (select your verb, please). Going into 2018, it’s hard not to feel a bit of trepidation, since any pronouncement made will be partly incorrect, at best. However, there are certain real estate trends that we can watch for in 2018.
Still, we all want a little insight into this crazy roller-coaster real estate ride—we all want an idea of the market trends to prepare for in 2018. The Canadian Real Estate Association released preliminary data in December that shows almost half of the country’s property markets are now in balanced territory—meaning supply is meeting demand. As we progress through 2018, more markets within Canada are are expected to shift towards this supply-demand equilibrium.
Given these expectations—and the long-running ‘when will the market crash’ inquiries—we’d like to offer some insight. Rather than weigh in on the ‘crash or no crash’ debate, we decided to focus on the biggest real estate trends to watch for in 2018. Here are the eight real estate market trends to watch for in 2018 in Canada.
Real estate trend #1: Expect prices to regress to the mean
Canada’s housing market is the crash that never happened. Ireland hit a housing crisis in 2007, while America’s housing market virtually failed in 2008, but the long-anticipated housing market crash in Canada just never happened. And analysts still don’t see it coming in 2018. According to most reports, the majority of Canada’s real estate markets will continue to grow in 2018—but at a glacially slow pace when comparing this growth to the astronomical price increases witnessed over the last decade.
In the report released in fall 2017, Moody’s Analytics warned Canadians to prepare for “several years of retrenchment.” Why? Because for the next five years housing prices are expected to rise at an anaemic rate. In the report, author Andres Carbacho-Burgos states that national prices will actually drop by 0.1% in 2018 and will only rise a meagre 1% in 2019 before levelling off to 1.3% for the years 2020, 2021 and 2022.
The Canadian Real Estate Association (CREA) is not as optimistic as Moody’s. CREA predicts an average price reduction of 1.4% in 2018. The price decline will be tough on speculators and investors, particularly when you compare it to the 4.2% average price increase in 2017 and the 10.9% average price increase in 2016.
Real estate trend #2: Death of the single-family detached home
Aside from first-time home buyers and Millennials, there is a casualty from the last decade of solid property appreciation: The single-detached house. Housing starts—the number of single-family homes that were started by builders and not scheduled for completion for a year or two—are starting to decline, with further reductions predicted in years to come.
The Canada Mortgage and Housing Corporation’s Fall 2017 Housing Market Outlook report predicts that low-rise starts, which had risen in 2017 in line with a surge in demand, will decline from 75,900 in 2017 to between 66,200 to 68,400 starts in 2018 and 66,100 to 68,900 in 2019.
While rising mortgage rates and new mortgage rules are certainly hampering the affordability of single-family homes, so are land constraints. According to CMHC’s principal market analyst, Dana Senagama, land constraints and labour constraints, particularly in high-value markets like Vancouver and Toronto, are nails in the single-family detached home coffin. Low-density sites are getting more and more expensive,” she explains. Low-rise housing starts—the term used for single-family detached and semi-detached homes—were well above 30,000 per year 15 years ago, but then there was “a real push towards high rise, a trend that began in 2006,” explained Senagama, in an earlier interview. As a result, low-rise starts have not surpassed the 20,000 mark since 2008. “Developers are focused on building high-density housing.”
Real estate trend #3: The year of the condo
So, what will increase? Condos. Yes, there are many, many cranes in the sky particularly in Vancouver and Toronto, but CMHC predicts there will be even more cranes in the sky, with condo starts expected to increase in 2017 (to between 128,800 and 139,400 units) before levelling off in 2018 (to between 124,400 and 136,200 units) and 2019 (to between 123,200 to 137,800). What’s significant is that these numbers are well above the historical average.
The condo’s popularity is due, in part, to demographics. “We have baby boomers that are downsizing and are liking the low-maintenance lifestyle,” explains Mustafa Abbasi, President of Zolo Realty. “We have families that have been priced-out (of the household) market, who are finding and making homes in urban condos—and millennials love the ‘live, work, play’ lifestyle.”
Abbasi adds, “the focus on condos isn’t solely in the building or the unit. The focus is shifting to include the community and neighbourhood.” Developers are listening. Rather than slapping up a building with cookie-cutter units, some developers are focusing on the amenities, the community, the lifestyle. “When you’re living in a smaller space, you care about what’s around your home. The parks, the neighbourhood, the stores, they become an extension of your home,” says Abbasi.
“The focus will be on building dense, more complete communities,” explains Kevin Lee, CEO of the Canadian Home Builders’ Association during a December interview. CMHC Chief Economist, Bob Dugan agrees. “We forecast that high price points and mortgage rates will shift demand away from the single detached home towards multi-family units.”
Real estate trend #4: Data is the new currency
The stories that dominated headlines in 2017 (and 2016) were those that dealt with the unknowns:
- How do foreign buyers impact housing prices?
- How many homes are left vacant?
- What impact does house-flipping have on neighbourhoods (and prices)?
- Are families being driven out of large urban centres due to high prices?
- Are short-term rentals hurting rental vacancy rates?
- Are we building too many high-rise condos?
Sure, there was a tonne of anecdotal information and a few people even tried to lend support to a few of the theories, with varying success. The real story, however, was the arcane and spotty methods of data collection on any matter that impacted real estate in Canada. No one could say, with certainty, how many foreign buyers were in the Metro Vancouver market or how many condos were sitting vacant. Plus, we still don’t know the precise impact house-flippers and speculators are having on major urban markets.
In 2016, the newly elected Trudeau Liberal’s pledged half a million to help the Canada Revenue Agency to tackle these data gaps. Part of this initiative meant an additional tax requirement, where all property sold in 2016 or later must now be reported in the annual income tax package. There were also new forms for foreign buyers and a concerted effort by the CRA to find house-flippers who aren’t paying income or capital gains tax on properties sold in Canada.
In 2018, we can probably expect more rules and regulations based on data. We can also expect better efforts by all policymakers to track data. What’s on the radar? Real estate speculation will get attention, as will information regarding your income (a key when creating more livable urban communities using rent-to-income geared housing projects). Also on the table will be square-footage and density data—two data sets that will inform zoning and planning decisions —as is real estate speculation (although definitions on this are still being determined).
Just don’t expect political stalling because of a lack of data. “Often you find in this realm is that the call for data and better data is used to forestall policy,” explained Simon Fraser University economist, Joshua Golden, in an earlier interview with Crosscut. “We don’t need to know how much cancer is being caused by smoking to know we want to tax smoking.” This perspective is what fuelled Vancouver’s foreign buyer tax and its empty homes tax. More will follow.
Real estate trend #5: Tech-disrupters will have their day
After years of battling it out in the courts, the Competition Bureau was vindicated when the Federal Court of Appeal denied the Toronto Real Estate Board’s appeal on December 1, 2017.
At the heart of the debate is whether or not TREB can or should protect information about home sales by denying brokers and other tech-disrupters from making this information in public.
The competition argued that TREB’s practice of keeping information about home sale prices and real estate agent commissions secret is anti-competitive and bad for consumers. TREB countered with concerns over privacy as a justification as to why it should be the gatekeeper for such information.
While TREB already filed an application to the Supreme Court of Canada—their decision on whether or not hear the case won’t come until sometime in 2018—it appears that TREB is fighting an uphill battle. Should the Supreme Court uphold the lower court’s decision (or even refuse to hear the case), the ruling could open the door to businesses and websites who can offer much more detailed information about home sales to the public, without the need to sign a contractual form. It’s how Zillow got its foothold in the U.S. MLS market back in 2006, before becoming the real estate behemoth it is today.
Even as the TREB appeal sits in legal limbo, there are tech-disrupters already looking to modernize and streamline aspects of the real estate business. For instance, business law firm Aird & Berlis LLP started to use artificial intelligence to help create efficiencies in its mergers and acquisitions department, when it comes to real estate business. Aaron Baer, a lawyer with Aird & Berlis, stated, in an interview with Canadian Lawyer magazine, that due diligence in M&A is an “incredibly important process that can be document-heavy and painstaking.” By investing in AI, the firm hopes to cut down on costs and time and provide more efficient service to its clients.
Real estate trend #6: Roller-coaster mortgage rate ride
After seven years of historically low-interest rates, the Bank of Canada finally increased its overnight rate in 2017. The two quarter-point increases were incremental, but signalled a shift—Canadians would now start to see rate rise, as predicted for the last 10 years.
But this doesn’t mean buyers should only expect rate increases. In a typical market cycle, lenders will drop their mortgage rates in the spring and the fall in an effort to attract the bulk of the new mortgage business. Towards the end of the year, as lenders start to near their fiscal year-end, rates will start to go up, particularly with lenders who have met their mortgage business targets for the year.
So, what does all this mean to those shopping for a mortgage in 2018? It means you can expect a certain amount of rate volatility. If you can time your mortgage rate ride, consider shopping or renewing or refinancing in the spring or fall and avoid renegotiating later in the year, if possible.
Real estate trend #7: Return of 30-year mortgages
This real estate trend is aimed at new home buyers and those looking to refinance. Most buyers and homeowners who must renegotiate their mortgages this year are going to be hit with a double-whammy: The implementation of the new mortgage stress-test and the threat of higher mortgage rates. The combination of these two factors will have a dramatic impact on how much a person will qualify for when applying for a mortgage loan; it will also mean buyers and mortgage brokers will need to colour very close to the lines to find creative ways to make the homeownership dream a reality.
One solution is to opt for a 30-year mortgage. Thirty-year amortizations are still available to any buyer with at least 20% equity in the home. Yes, you have to pay CMHC fees, but tacking on a fee of $10,000 or $20,000 may be worth it if it means avoiding a budget-busting monthly mortgage payment or being denied outright.
“The percentage of homes being written at 30 years [amortization] has gone up materially in the last six months,” explained Mark Aldridge, President and CEO of MCAP, during last year’s Mortgage Professionals Canada’s annual National Mortgage Conference.
Aldridge believes the new regulations don’t just impact new buyers, but those renewing their mortgages—the homeowners who won’t be able to re-qualify based on the new mortgage stress-test. He’s worried this will also prompt a lack of competition. “You’re stuck at that bank. And believe me, the banks have the data, so they can charge 20 or 30 bps more for customers who have nowhere to go.”
Real estate trend #8: Mobility is the key
The golden formula in real estate is “Location, location, location.” Going into 2018, you can expect to add mobility to our list of real estate trends. While real property, itself, is immovable, the factors impacting the business of real estate are increasingly mobile.
Mobility is the biggest emerging trend in the real estate market according to PwC Canada and the Urban Land Institute, as stated in their 2018 Emerging Trends in Real Estate report.
According to the report analysts, real estate investors, owners and developers are increasingly optimistic about opportunities in the Canadian real estate sector. This certainly makes sense given that prices and market activity is returning to balanced territory in most market segments. It means that there will be an increased push from institutional and trust investors to find strategic and innovative portfolio opportunities, as they hunt for better and stronger yields. It also means that “capital is no longer an advantage,” as one report interviewee explained. “The advantage comes from being able to move quickly, deal with more complexity and leverage strategic partners.”
This need to pivot and act quickly will require an ability to move where the opportunities exist. That will mean from neighbourhood to neighbourhood and from city to city. As the report points out, “real estate development is expected to grow stronger in  and in years to come,” with an emphasis on areas where money is being invested to improve transit and commuter resources.
Mobility will also dictate how real estate information is consumed and deals are finalized. Real estate companies will need to invest in and employ all their technological advancements in order to “mitigate risk…and open up new profitable possibilities.” Faster access to information, better access to more data and the ability to contextualize all this information will be key to identifying profitable opportunities throughout the year.
*provided by Ramone king