What is going to happen to real estate prices
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According to a report from the National Bank of Canada (NBC), major Canadian urban centers became more affordable when it comes to real estate in the second quarter of 2020. These results followed two consecutive quarters of deterioration. The improvement is linked to higher incomes and, more importantly, lower interest rates.
In the second quarter, mortgage rates fell by 0.19%, reflecting decisions by the central bank, the report notes. Combined with income levels, mortgage rates were sufficient to offset the increase in property prices.
NBC states that the quarterly figures do not capture the full picture of the decline in five-year fixed rates over the entire course of the pandemic.
Preliminary rate data point to further improvements in the third quarter of this year (the cumulative decline could amount to more than 0.70%), the report states. While we believe this will help improve affordability, home prices are likely to remain resilient, based on recent data from the resale market showing record-breaking sales.
Over the past couple of months, it isn't just economic and housing market indicators that have improved - homeowner sentiment has as well.
The second of four surveys conducted by Mortgage Professionals Canada showed improved homeowner confidence in August compared to July.
To begin with, the survey showed an increase in the share of Canadians who don't yet own a home but plan to purchase property within the coming year, rising from 7% at the end of 2019 to 16% last month. Second, there was a significant decline in the share of the same respondents who said they would never buy a home: from 32% down to 19%.
In addition, the number of Canadians who believe now is an excellent time to buy a house or condo also rose - from a rating of 5.82 at the end of last year and 6.0 in July, to 6.18 in August. As a reminder, a rating of 8 to 10 indicates high optimism, while 1 to 3 indicates strong pessimism.
Consumers are also more likely to expect home prices to rise (a jump from 5.94 in July to 6.46 in August).
Despite heightened activity and rising real estate prices, more pessimistic forecasts are also emerging. According to a new report, the pandemic will hit home prices hardest in the Prairie region, though even hot markets like Toronto and Vancouver could still see price declines amid growing affordability in the rental market and lower immigration.
A forecast from Moody's Analytics and RPS Real Property Solutions Inc. indicates that the price of a single-family detached home could fall by 6.7% next year, driven by a slowing recovery, reduced economic stimulus, and mounting debt-related concerns. Across all property types, the average expected decline could exceed 7%.
Calgary and Edmonton are expected to see the sharpest price declines - 10% next year - as the energy market continues to struggle. Regina follows, with a decline of more than 9%. Toronto is expected to see prices fall by approximately 9%, while Vancouver is projected to decline by less than 7%. The real estate market will no longer be able to avoid weak labor market conditions, as vacancy rates and default rates are set to rise in 2021, the report states.
It notes that high unemployment and lower incomes will hold back the return of buyers to the market - as will affordability challenges in Vancouver and Toronto. In addition, immigration to Canada, which has declined due to COVID-19, will continue to weigh on demand. Even low rates won't be enough to save the real estate market.
One positive trend is coming from urban residents who, due to the need to work from home, are now looking for housing in the suburbs with more space.
The pandemic has intensified demand for properties offering more room to work from home and less shared space with neighbours; smaller markets with similar, more affordable properties stand to benefit from this trend, according to the Moody's Analytics report.
Partial confirmation of this forecast comes from the fact that the flow of Toronto residents leaving their downtown condos in search of more space and better affordability is triggering a chain reaction across real estate markets in Southern Ontario - all the way to Fort Erie. This is according to numerous brokers and real estate agents.
After COVID-19 hit Canada and made working from home the new normal for thousands of residents, the first chain reaction was observed in downtown Toronto, as many residents left their condos in search of more affordable housing with a backyard and office space.
This drew many to Hamilton - a city close enough to Toronto to stay within reach while still being affordable enough to buy a detached home. Demand drove remarkable activity in the Hamilton market, and agents in the region say some residents are heading even farther out, toward the Niagara region. A similar phenomenon occurred, in turn, in Niagara, where agents cite Fort Erie as a popular destination.
Meanwhile, Toronto's condo market is finally cooling - something that seemed impossible just earlier this year. Condo sales in the second quarter fell more than 50% compared to the same period last year, according to the Toronto Regional Real Estate Board. Condo pre-construction sales fell even further, dropping 85%, as investors - who typically account for two-thirds of such purchases - are now choosing not to take the risk.
The appeal of this type of property has always come down to trading off space in exchange for living downtown, close to restaurants, concerts, bars, the subway, and yes, jobs. But with offices closed and concerts and sporting events cancelled, and with restaurants and bars still not feeling safe, that trade-off has become far less appealing.
Millennials make up the majority of those leaving Toronto for Hamilton. There, the average property price at the end of August was $662,257, according to the Cornerstone Association of Realtors (Hamilton-Burlington). Additional interest from Toronto buyers has turned this market into one of the hottest in Ontario.
Market conditions are now such that buyers need to be prepared to raise their offer by $50,000 to $100,000 and forgo any conditions, such as a home inspection or full financing approval, in order to secure a home of their own.