With house prices at astronomical levels in many cities, a growing number of Canada’s would-be homebuyers are hoping for a market crash. In Vancouver, North America’s least affordable housing market, a recent poll showed nearly two-thirds of residents, including many homeowners, want to see house prices come down.
And as we head towards 2019 with a weakened Toronto housing market and a Vancouver market in free fall, many sense this may be the year they get their wish.
The experts aren’t so sure. Yes, the global economy is slowing down, and at a time when Canada’s real estate markets are already under pressure from rising mortgage rates and the federally mandated mortgage “stress test.” But there is still plenty holding up Canada’s housing markets, they say, including strong immigration levels and a robust job market.
Still, the experts are largely unanimous that the days of rapid house price growth are over in pretty much all Canadian housing markets. The next few years are likely to see slower sales and tepid, if any, price growth.
Here are four things that will (and won’t) happen in Canada’s housing markets in 2019.
1. More homeowners will default on their debts
It’s been a year-and-a-half since the Bank of Canada started raising interest rates, putting pressure on borrowers. By the bank’s own models, that’s about the amount of time it takes for rate hikes to be felt in the housing market. So the impact of higher borrowing costs is about to become an even tougher headwind for housing.
A recent forecast from the country’s licensed insolvency trustees industry group predicted a spike in defaults among Canadian households starting in early 2019. However, recent data from the Canadian Bankers Association suggests that the increase in defaults has already begun, a little ahead of schedule.
2. Housing affordability will be an election issue
According to Royal Bank of Canada, housing affordability is at its worst levels ever in Toronto and Vancouver, and at its worst in three decades countrywide.
A poll carried out by Abacus Data earlier this year found housing affordability has climbed to be the top issue for millennials, who next year will make up the largest voting cohort in the federal election.
Fully 64 per cent want the federal government to do something about house prices, compared to 48 per cent who want the government to fight climate change, and 33 per cent who want a focus on infrastructure.
Rob McLister, co-founder of RateSpy.com, believes politicians will “try to win the minds of first-time buyers” by making mortgages more accessible.
He sees “one of three policy tweaks” happening in 2019: An upper limit to the interest rate used in the mortgage “stress test”; the return of 30-year mortgages for first-time buyers; or an exemption from the stress test for those who switch lenders.
3. Affordability won’t get much worse (because it can’t)
On home affordability, “those hoping to get a meaningful break in 2019 will likely be disappointed,” RBC said in its latest affordability index, released in December. “We expect the Bank of Canada to hike the overnight rate two more times next year, which will sustain upward pressure on ownership costs.”
But RBC’s economists don’t see affordability worsening much either, thanks to softening price growth (or outright price declines) in some markets.
A lack of affordability may be a permanent fixture in Canada’s largest urban centres.
CPA Canada
And there is another reason affordability won’t worsen much: it can’t. At current price levels and mortgage rates, home affordability is at its worst levels since the early 1990s, when a housing bubble and rising interest rates sent ownership costs through the roof.
Canada’s housing market has reached a similar peak of unaffordability today, as the chart below from RBC shows. Homebuyers are reaching the mathematical limits of what they can afford, and fatigue is setting in.
RBC ECONOMICS: Royal Bank of Canada’s home affordability index measures the percentage of income an average household would have to spend each month to afford an average home. The higher the number, the less affordable the housing market. For single-family homes (gray line), affordability is the worst on record.
4. The market won’t crash
Canada’s unusually high levels of household debt are why the country has been named one of the likeliest places to experience a financial crisis. That has many wondering whether the country is in for a housing bust of the sort that took place in the U.S. a decade ago.
Barring a major economic crisis in Canada next year, it’s unlikely.
The largest contributors to the U.S. crash were subprime mortgages, many of which saw a spike in rates around 2007, exposing many borrowers to payments they could never have afforded. Canada’s mortgage borrowers are much more credit-worthy, according to a recent study from Chartered Professional Accountants (CPA) Canada.
And despite rapidly rising house prices, the creditworthiness of Canada’s borrowers has actually improved in recent years, the study noted. The share of new homebuyers with very good or excellent credit quality rose to 82.4 per cent from 79.4 per cent between 2013 and 2017.
Unlike the case in the U.S. a decade ago, “this suggests that home price gains are being driven by those who can actually afford such prices,” CPA Canada chief economist Francis Fong wrote in the study.
High household debt levels are still a risk to the economy, CPA Canada noted. But sadly for homebuyers, “a lack of affordability may be a permanent fixture in Canada’s largest urban centres.”