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Canadian home prices expected to keep rising this year, outpacing inflation
Poll of property market analysts finds prices expected to rise 5% this year
Authors of the article:
Mumal Rathore and Richa Rebello
The Canadian housing market has showed resilience, helped by record low mortgage rates and massive fiscal spending.
BENGALURU Canadian house prices will continue their upwards march this year, outpacing inflation after hitting record highs in 2020, according to a Reuters poll of property market analysts who said the risk of a COVID-19 resurgence derailing activity was low.
Renewed lockdown restrictions after a second wave of infections hit the country are threatening expectations for a strong recovery after the economy likely posted its biggest GDP drop on record of 5.1 per cent in 2020.
Yet the Canadian housing market showed resilience, helped by record low mortgage rates and massive fiscal spending.
The Jan. 12-29 poll of 15 property market analysts showed house prices would rise 5 per cent on average this year nationally. That was the highest prediction since Reuters began polling for 2021 in February 2019.
Prices were expected to jump 4 per cent further next year compared to 3 per cent forecast in September. Both 2021 and 2022 predictions are significantly higher than inflation expectations.
Historically low interest rates, changing housing needs, high household savings and improving consumer confidence will keep demand (for homes) supercharged, said Robert Hogue, senior economist at RBC.
The main restraining factors will be a lack of supply, waning pandemic-induced market churn, a modest creep-up in interest rates and an erosion of affordability. Call it a 2022 soft landing.
The Bank of Canada was predicted to keep its key interest rate unchanged at near-zero levels until at least 2024, according to a separate Reuters poll.
House prices in Toronto and Vancouver were expected to rise 5.3 per cent and 4.1 per cent this year respectively, up from 2 per cent predicted for both in September.
Apart from easy monetary policy, a desire for more living space and a successful vaccine rollout were identified as the potential drivers of Canadian housing market activity this year, the poll showed.
While prices are set to rise again this year, nine of 14 economists who answered an additional question on whether activity would be faster or slower than in 2020 said it was likely to be slower over the coming year.
But most economists who responded to another question said the risk of a resurgence in COVID-19 cases derailing the housing market this year was low.
Fading income support, expiring mortgage deferrals and rising interest rates would strongly suggest that the housing market will downshift over the course of 2021, said Brendan LaCerda, senior economist at Moodys Analytics.
Housing is at risk, but not from COVID-19.
Affordability remains a concern. When asked to assess house prices on a scale of 1 to 10, where 1 is cheap and 10 is expensive, respondents rated national, Toronto and Vancouver at 7, 8 and 9, respectively.
Lower interest rates have improved affordability despite the increase in prices. However, that only implies homes are cheap conditional on rates. Rising rates in 2021 will strain affordability, said LaCerda.
Similar Housing Demand Conditions in Canada and US
Housing markets in Canada and the US are sizzling. Recent headlines have used superlatives to describe housing market conditions in both countries and the data do back this up. Still, a closer look reveals some interesting distinctions as well. Home price and sales metrics show that while the US market is hot, Canadas is hotter. For example, existing home sales, which make up the majority of overall sales in both countries, is well above historical averages, but Canadian home sales have outperformed. As of March 2021, home sales in Canada were 75% higher than the average over 2018 and 2019, while it was 13% above in the US. Likewise, home prices also spiked. In Canada, the average home sold was 32% more expensive than what it was a year ago, and it was 17% higher stateside.
From a high level, the list of commonalties across markets during the pandemic is longer than the areas of difference, particularly on the demand side. Perhaps the most influential demand-side driver has been historically low mortgage rates. Responding to the impacts of the pandemic, the Bank of Canada and the Federal Reserve slashed rates and enacted large quantitative easing programs early last year, resulting in a sharp drop in borrowing costs. Given that the US conventional mortgage rate is a 30-year rate compared to Canadas 5-year benchmark, borrowing costs fell faster in America as flight to safety flows lowered longer term yields at the onset of the pandemic.
CANADA HOUSING MARKET and new stress test
Canadian home sales took a turn in April 2021, declining by 12.5% (sa m/m) from the highest level on record in March 2021. Listings followed suit, falling by 5.4% (sa m/m). While both sales and listings decreased in April, the smaller decline in listings further eased the national-level sales-to-new listings to 75.2% from record high readings earlier this year (the highest being 91% in January). While this is a move in the right direction towards a better supply-demand balance, the ratio is still significantly higher than its long-term average of 54.5%. As a result of this persistent tightness in the housing market, the composite MLS Home Price Index (HPI) rose by 2.4% (sa m/m). This is a deceleration in price gains from paces observed over the last two months, owing in the most part to a slowing in prices for single-family homes and townhouses. Apartments, which had remained relatively close to pre-pandemic levels before accelerating earlier this year have maintained momentum in April.
Movements in the housing market this month continued to be broad-based rather than market-specific, as declines in sales were spread out across much of the country.
The Office of the Superintendent of Financial Institutions (OSFI) also announced that, effective June 1, the minimum qualifying rate for uninsured mortgages (i.e., residential mortgages with a down payment of 20 percent or more) will be the greater of the mortgage contract rate plus 2 percent or 5.25 percent.