Canada’s house prices will come off the boil next year, rising only modestly after a mini-boom in the middle of the pandemic, according to a Reuters poll of property market analysts who still expect affordability to worsen in the coming years.
What may accelerate the slowdown already in train is the impending shift in monetary policy now the country is emerging well-vaccinated from the pandemic and the economy is expanding strongly again.
Strong prospects for the Bank of Canada to raise interest rates as early as next year from record lows have analysts convinced the market isn’t necessarily cooling yet, but the worst of the heat is starting to disperse.
“The dramatic fall in interest rates created a sense of urgency to get into the market, so in many ways people borrowed activity from the future, and now it seems the future has arrived,” said Benjamin Tal, deputy chief economist at CIBC Capital Markets.
“Never before has the housing market been so sensitive to the risk of higher rates. A lot of debt has been taken on, in a very low rate environment, so even a modest increase in rates can have a notable impact on housing demand.”
Home prices have soared about 25% since the pandemic began and around 200% in the last 16 years, according to Canadian Real Estate Association data.
After an expected 16.0% rise this year, average house prices nationally will increase just 3.2% next year, the August 11-19 poll of 16 economists showed. That was a downgrade from 3.7% predicted three months ago.
Around three-quarters of respondents expected demand for housing to ease across the country this year, including in hot spots like Toronto and Vancouver, while nearly 60% predicted that the chill would linger at least a little while longer.
Higher interest rates were identified as the biggest downside risk to the Canadian housing market over the next 12 months, according to over 45% of respondents, 7 of 15, who responded to an extra question.
Over 25% said it was the potential spread of new coronavirus variants.
NOT ENOUGH HOMES TO BUY
A supply-demand imbalance, which was already heavily skewed before the pandemic began, has pushed home prices out of reach for most first-time buyers. Consumer price inflation at a decade high has only made it worse.
“The supply shortage issue is also related to the affordability issue, which is, are Canadians building the types of homes that are best suited to the whole population?” asked Brendan LaCerda, senior economist at Moody’s Analytics.
“First-time homebuyers will feel the pain more acutely in particular. Saving up for the down payment is much more difficult when you are chasing rising prices.”
About 70% of respondents, 11 out of 16, expected affordability to worsen over the next two to three years.
The broad trend of double-digit price gains this year followed by a moderate rise next year is likely to be the case for major Canadian cities as well.
In Toronto, the poll predicted they will rise just under 15% in 2021 and 4.0% next. In Vancouver, they are expected to increase 13.2% and 4.0%, respectively.
Poll respondents rated those two cities a 9 on a scale of 1 to 10 for expense, where 10 is the most expensive, compared with a median of 7 for the country as a whole.
Although Canadian housing starts are high by historical standards, hitting a new record earlier this year, they are far short of strong demand, even during the pandemic when immigration has been limited.
Asked how long it would take for the shortage to ease, 60% of respondents, or 9 out of 15, said it will be over two years.
“There is no end to the supply shortage in sight in the Canadian housing market, even beyond a two-year horizon,” said Jean-Francois Perrault, senior vice-president and chief economist at Scotiabank.