03 Jan 2018 Real Estate 2018: What to Expect by Linda Williams
Expect interest rates to rise in 2018. Bank of Canada has indicated that borrowers should expect to see rate increases this year … and notably, nearly half of Canadian mortgage holders are set to renew their mortgages in the next 12 months. Combined with the new, more stringent “stress test” requirements, a greater number of homeowners will be opting for five-year-fixed rate mortgages over the historically popular variable rate mortgages.6
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As we head into a new year, the most common
question we receive is, “What’s the outlook for real estate in 2018?”
It’s not just potential buyers and sellers who
care; current homeowners also want reassurance about the value of their
investment. No one knows exactly what 2018 will bring, but we’ve outlined
expert predictions on where the market is headed and how government
interventions are expected to impact the Canadian housing market in the year
ahead.
HOUSING
PRICES WILL REMAIN HIGH IN URBAN CENTRES
Although the Toronto real estate market did
experience a slowdown in 2017, housing affordability will remain a major issue
in both Toronto and Vancouver in 2018. According to the Royal Bank of Canada’s
most recent Housing Trends and Affordability Report, as of
Q2 2017 it cost more than 75 percent (Toronto) and 80 percent (Vancouver) of
median household income to cover the average cost of owning a home.1
In an effort to stabilize prices, both the
Ontario and British Columbia governments enacted a 15 percent tax on foreign
investments in housing. However, according to the PricewaterhouseCoopers report
on Emerging Trends in Real Estate: Canada and the United
States 2018, “Industry players are skeptical that recent tax moves …
to curtail foreign investment will have a long term cooling impact on housing
affordability in Toronto and Vancouver.”2
In its Canadian Regional Housing Outlook, TD
Economics predicts ”The decline in sales activity in both Vancouver and Toronto
has helped to redistribute the balance of power from a pure seller’s market,
back towards buyers, as evidenced by the sales-to-listing ratios. But, first-time
homebuyers sitting on the sidelines waiting for higher interest rates to
trigger a market crash may be holding their breath for a while. Prices are
likely to only reset back to levels that existed prior to a year of exorbitant
gains.”3
The high cost of living has forced a growing
number of millennials to seek alternatives to traditional housing. The 2016
census found 47.4 percent of young adults in Toronto and 38.6 percent in
Vancouver live with a parent. PricewaterhouseCoopers predicts a rise in
multi-generational and multi-family homes, a move towards larger condominiums
to suit growing families, and a flight from urban cores as new public transit
projects make commuting more feasible.2
What does it mean for you?
If you’re a current homeowner, you can expect your investment to hold its value
and continue to appreciate over the long term. And if you’re considering
selling this year, contact us to request a free Comparative Market Analysis to
find out how much you can expect your home to sell for under current market
conditions.
If you’re a potential buyer who has been
waiting for real estate prices to drop, don’t expect a fallout any time soon.
Governmental bodies have taken steps to slow down skyrocketing prices, which
has helped to balance the market. Now is a great time to buy. And if
traditional housing options don’t fit your budget, we can help you find
alternatives to meet your needs.
GOVERNMENT
INTERVENTIONS WILL HELP TO STABILIZE THE MARKET
Skyrocketing real estate prices have caused
Canadians to take on a growing amount of debt. The federal Parliamentary Budget
Office (PBO) reports that the average household
indebtedness is up to 174 percent of disposable income, and they predict it
will reach 180 percent by the end of 2018. Coupled with rising interest rates,
the share of income that will go towards debt payments is expected to reach
historic proportions.4
Regulators at the Office of the Superintendent
of Financial Institutions (OSFI) have attempted to curb the potential fallout
with interventions, the latest of which went into effect on January 1. These
new regulations raise the requirements for mortgage borrowers with down
payments of 20 percent or more. They are now required to qualify for a mortgage
at an interest rate two percentage points higher than their current rate to
ensure they can manage payments when interest rates do inevitably rise.
A similar “stress test” was enacted in 2016
for borrowers who put down less than 20 percent, but that regulation impacted a
much smaller percentage of buyers.
According to Jeremy Rudin, the head of OSFI, “We clearly
see the potential risks caused by high household indebtedness across Canada,
and by high real estate prices in some markets. We are not waiting to see those
risks crystallize in rising arrears and defaults before we act.”5
All federally regulated financial institutions
will be obligated to utilize these requirements for both new mortgages and
mortgage renewal applications of borrowers applying to switch lenders. It is
not mandatory to apply the test at mortgage renewal for existing borrowers.
Since credit unions are regulated provincially, they are not required to follow
the new OSFI rules, although some may choose to out of prudency.
What does it mean for you?
With new rules in effect, if you’re a buyer, your purchasing power may be
impacted. If you’re concerned you may not be able to meet these requirements,
securing your mortgage through a credit union may be an option. We are
following this issue closely. Give us a call so we can discuss how these new
rules will affect your home search.
If you’re considering selling your home this
year, these regulations could alter the type of buyer who will be willing and
able to purchase your home. We have expertise in this area and know how to
market your home to a changing demographic.
5 YEAR
MORTGAGES WILL MAKE A COMEBACK
Expect interest rates to rise in 2018. Bank of Canada has indicated that borrowers should expect to see rate increases this year … and notably, nearly half of Canadian mortgage holders are set to renew their mortgages in the next 12 months. Combined with the new, more stringent “stress test” requirements, a greater number of homeowners will be opting for five-year-fixed rate mortgages over the historically popular variable rate mortgages.6
According to LowerRates.ca, “Since January
2014, 56% of Canadian borrowers who applied for a mortgage through
LowestRates.ca have gone variable, compared with 43% of those who got a
five-year fixed. But this past August, there was a shift, where the
five-year-fixed rate mortgage saw a sharp increase in applicants, with 59% of
users on the LowestRates.ca site opting for this option versus only 39% opting
for the variable mortgage.”7
What does it mean for you?
If you’re in the market to buy, act now. Rising interest rates will decrease
your purchasing power, so act quickly before interest rates go up. Give us a
call today to get your home search started.
And if you’re a current homeowner who is set
to renew your mortgage, you may want to consider locking in a five-year-fixed
rate. Contact us if you would like assistance navigating your options.
2018 ACTION PLAN
If you plan to BUY this year:
If
you plan to SELL this year:
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WE’RE
HERE TO HELP
While national real estate numbers and
predictions can provide a “big-picture” outlook for the year, real estate is
local. And as local market experts, we can guide you through the ins and outs
of our market, and the local issues that are likely to drive home values in
your particular neighbourhood. If you have specific questions, or would like
more information about where we see real estate headed in our area, please give
us a call! We’d love to discuss how issues here at home are likely to impact
your desire to buy or a sell a home this year.
Sources:
1. Royal Bank of Canada’s Housing
Trends and Affordability Report -
http://www.rbc.com/newsroom/_assets-custom/pdf/20170929-ha.pdf
http://www.rbc.com/newsroom/_assets-custom/pdf/20170929-ha.pdf
2. PricewaterhouseCoopers
Emerging Trends in Real Estate 2018 –
https://www.pwc.com/ca/en/real-estate/assets/Real_Estate_ETRE_2018_PDF.pdf
https://www.pwc.com/ca/en/real-estate/assets/Real_Estate_ETRE_2018_PDF.pdf
3. TD Economics Canadian Regional
Housing Outlook –
https://economics.td.com/canadian-regional-housing-outlook-aug-2017
https://economics.td.com/canadian-regional-housing-outlook-aug-2017
4. Office of the Parliamentary
Budget Officer -
http://www.pbo-dpb.gc.ca/en/blog/news/HH_Vulnerability
http://www.pbo-dpb.gc.ca/en/blog/news/HH_Vulnerability
5. Financial Post
http://business.financialpost.com/personal-finance/stricter-osfi-rules-on-mortgage-lending-will-do-more-harm-than-good-fraser-institute
http://business.financialpost.com/personal-finance/stricter-osfi-rules-on-mortgage-lending-will-do-more-harm-than-good-fraser-institute
6. Bank of Canada Financial
System Review November 2018 –
https://www.bankofcanada.ca/wp-content/uploads/2017/11/fsr-november2017.pdf
https://www.bankofcanada.ca/wp-content/uploads/2017/11/fsr-november2017.pdf
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7. Maclean’s –
http://www.macleans.ca/economy/money-economy/canadians-rushing-to-lock-down-five-year-fixed-rate-mortgages/
http://www.macleans.ca/economy/money-economy/canadians-rushing-to-lock-down-five-year-fixed-rate-mortgages/
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