This is where economists see Canada’s housing market heading in 2018

By: Jessica Mach on November 17, 2017

2017 was a volatile year for the Canadian housing market.

But the economists at Canada’s biggest banks are expecting a much more tame performance in 2018. The slew of new policies introduced this year in provinces such as Ontario and British Columbia, combined with new federal policies set to take effect next year, will create a lot of downward pressure on prices.

Most economists are predicting that housing prices in 2018 will grow marginally in most provinces.

“To put it in perspective, we are now looking for a 7-10% drop in housing starts next year, a 1-5% pullback in existing sales, and a slowdown in the national MLS price index to around 0-to-4% from roughly a 14% spike this year,” said economists at BMO Capital Markets in a recent note.

Vancouver is hot again, Toronto cools

There’s been a lot of change in Canada’s housing markets in the past few months.

In the Greater Toronto Area, the number of home sold dropped off a cliff beginning in spring, with the introduction of new rules by the government of Ontario. That also finally put an end to the runaway price growth that culminated with prices rising 33% on an annual basis in March. Price growth in October was a much more manageable 2.3%.

These relatively balanced conditions will help stabilize the market in 2018, says a report issued by Scotiabank this week. Benchmark home prices in the GTA saw little change in September and October, and the number of homes being sold remain down significantly from the peaks seen in 2016 and 2017.

Meanwhile, the same report found that sales in Vancouver’s housing market have become red-hot once again — and could continue that momentum in the new year. The city introduced new rules in 2016 that taxed foreign buyers purchasing homes by 15%. While sales plummeted in the months after the rules were introduced, they’ve bounced back — and are at their highest level since June 2016.

The returning demand could lead to record new prices in 2018.

Price growth in rest of Canada to be subdued in 2018

As for the rest of Canada, Scotiabank has found housing activity to be relatively stable in comparison to the GTA and Vancouver. Low borrowing costs, robust job growth and historically high immigration rates will keep demand for housing steady, but upcoming regulations, including OSFI’s new mortgage restrictions, are expected to cool the rate of home sales beginning in January.

Meanwhile, while the GTA will see price growth, housing markets in the rest of Ontario are going to be pressured by all the new rules.

In April, the Ontario government launched its Fair Housing Plan (OFHP), which expanded existing rent control regulations, and introduced a 15% foreign buyer’s tax similar to the one implemented in Vancouver in 2016.

More pressure on prices could also stem from cities moving to crack down on short-term rental services, which some have blamed as contributing to high prices. Vancouver approved a crackdown on short-term rental networks like Airbnb earlier this week, in an effort to open up more spaces for long-term rentals and, by extension, lend stability to rising housing prices. Toronto is set to follow suit.

Housing market updates from the four banks consistently report that the OFHP was able to slow down activity by damaging the confidence of would-be buyers. The psyches of domestic buyers were especially impacted, says CIBC’s Benjamin Tal.

Expect a Christmas buying rush ahead of new OSFI rules

October saw strong homebuying across Canada, and economists say that the bounce in demand is in response to the new OSFI rules taking effect in January. Those new rules will require homeowners who put down a 20% downpayment to prove they can afford to make their mortgage payments at either two percentage points higher than the rate they qualify, or the five-year average mortgage rate as posted by the Bank of Canada — whichever one is higher. Buyers who put down less than 20% have already been forced to undergo the stress test.

The new rules are expected to decrease buying power by 15% for the average Canadian homebuyer — meaning anyone who could afford a $1 million mortgage before can only get an $850,000 mortgage now.

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