Given the impact that changes to the housing market can have on our financial future, it makes sense to pay attention to where the market’s been – and where it may be going. Since the crisis of 2008, residential real estate has been fairly stable in Canada. Still, there have been notable changes. Some industry experts give their take on how it’s changed, and what they think is coming next.
How was Canada’s residential real estate market affected by the 2008 financial crisis? For instance, how did it affect mortgage rates or people’s buying behaviour?
Brad Henderson, President and CEO of Sotheby’s International Realty Canada, notes that the impact to Canadian markets was minimal. “While many of Canada’s major housing markets experienced an initial shock when the 2008 financial crisis took hold, most recovered quickly. After peaking in 2007, Vancouver, Toronto and Montreal experienced a pullback in sales volume in 2008 and into 2009; however, there were no significant drops in property prices. By 2009, housing prices in these three metropolitan areas had begun to increase, and by 2010 each of these markets had experienced significant price gains above pre-recession levels. Calgary took a few more years to recover and stabilized by 2013, while Canada’s recreational real estate markets were more dramatically impacted and took additional time to recover.”
Dominic St-Pierre, Vice President and General Manager at Royal LePage in Quebec, believes that not only was the impact of the crisis negligible, it may even have had a positive effect. “One could say that the crisis even helped the Canadian real estate market, as banks ended up lowering the overnight rate to historic lows. While interest rates started to pick up again over the past two years, consumers here are still benefiting from lower than normal rates.”
Scott Bartle, a sales representative with RE/MAX West Realty Inc., saw this period as having a somewhat positive effect for Canadians. “Because our dollar fared so well compared to the U.S. dollar, our real estate became more attractive as a safe investment to the rest of the world. Canadians, on the other hand, saw buying opportunities in the U.S. For the five years following 2008, many of them purchased property in the vacation or retirement states, such as Florida and Arizona.
How did the 2008 situation in Canada compare to the rest of the world, and what do you think is the reason for any differences?
St-Pierre believes the Canadian housing market was largely unaffected during that period, mainly due to our tighter lending regulations – which have continued to tighten since then. Our neighbours to the south didn’t fare so well. The reason, he notes, is twofold: “The U.S. economy and housing market suffered much more because U.S. financial institutions were allowed to turn high-risk loans into mortgage-backed securities. These were then sold to investors who did not know what they were buying. Once the loans started to default, it created a chain reaction that destroyed both the housing and financial markets. Canada experienced a setback due to the financial part of the crisis, but our housing market remained mostly intact thanks to strong economic fundamentals.”
Since the financial crisis, what changes have occurred in Canada’s governmental policy with regards to real estate?
“In July of 2008,” notes Henderson, “a number of new mortgage rules were introduced to reduce financial system vulnerabilities and protect real estate consumers. Amortizations were shortened from 40 years to 35 years, a minimum down payment of 5% was required, new documentation was required to prove property values and borrower’s sources and levels of income, and a credit score of 620 was required with some limited exceptions.”
St-Pierre adds that, more recently, the Office of the Superintendent of Financial Institutions (OSFI) has put a mortgage financing stress test in place to further secure market sustainability. “With this new regulation, financial institutions need to impose a stress test on buyers to ensure that they are able to afford a rise in interest rates during their loan term. In order for a buyer to qualify for a loan, banks need to demonstrate that the buyer could afford an interest rate equal to their current approved rate plus 2%, or the average five-year posted rate, whichever is higher.”
Another policy change that’s come about more recently was in response to concerns about foreign investment. St-Pierre says: “Prior to the OSFI stress test, a 15% foreign-buyer transfer tax was launched in the past two years in two of Canada’s largest cities (Vancouver and Toronto). This was a reaction to concerns about foreign investors driving up residential real estate prices. Just before the introduction of the new tax, foreign buyers represented about 5% of the market in Toronto. In Vancouver, their proportion at the time had reached about 16%. The new regulations have helped slow down the market and stabilize housing prices slightly. That being said, foreign buyers aren’t the sole driver for price appreciation. Royal LePage believes that the lack of inventory is largely responsible for recent runaway home prices beyond the historic norm, as Canada’s largest cities struggle to meet increasing housing demands.”
What does the residential real estate landscape look like in Canada today?
According to Henderson, overall national sales activity pulled back in the fall of 2018. However, market performance has varied widely between Canada’s major metropolitan areas, and between housing segments within each market. “As the country’s largest real estate market, activity in the Greater Toronto Area (GTA) has been notably robust, particularly in the City of Toronto. This has continued to place upward pressure on prices. Overall price gains have largely been driven by the condominium and attached home segment. Consumer demand in Toronto’s luxury housing market has been particularly heated, limited only by the lack of available inventory.”
He adds that, “Activity and pricing in Vancouver’s real estate market have slowed down across the board, as the market responds to rising interest rates and the cooling effects of recent housing taxes and policies. A challenging economy continues to dampen consumer confidence, sales activity, and pricing in the Calgary market. Montreal is emerging as a real estate ‘hot spot’ not just within Canada, but as a global market on the world stage. Conventional and luxury real estate sales are set to surpass 2017 records to reach new highs in 2018, and demand is expected to remain strong into the new year.”
St-Pierre believes the Canadian economy is on solid footing, although 2018 will see a lower expansion rate when compared to last year. “Double-digit home appreciation has disappeared from the Greater Toronto or Greater Vancouver real estate markets. Price appreciation in the Greater Montreal Area is strong, but nowhere near the extremes witnessed in the GTA and Greater Vancouver. Condominium prices in the City of Toronto and City of Vancouver have also become more moderate.”
St-Pierre believes Canada’s biggest concern is the supply problem we’re facing due to increased demand. “Canada is one of the fastest growing developed countries in the world today in terms of demographics. This increase comes down to three main factors:
1. Millennials, who make up the largest demographic cohort of our population, surpassing baby boomers, are now entering the housing market.
2. Baby boomers are living longer and holding onto their homes, leaving fewer single-family detached homes available for purchase.
3. We have a growing population of immigrants, with this demographic gravitating towards Vancouver, Toronto and Montreal.”
“We simply can’t build residential property fast enough to meet the growing demand,” says St-Pierre. Added to this, “Canada has much tighter regulations for builders and permits than other countries, and this impedes residential development significantly.” The solution, he thinks, is condo development.
“Condominium development is the most effective type of housing to accommodate Canada’s growth in terms of land use and affordability. By focusing on vertical living and developing larger, affordable condominiums in urban markets, supply limitations would ease, providing long-term, appealing solutions, especially to young buyers and families in search of affordable property.”
Where do you see the Canadian housing market going five to ten years from now?
Henderson feels confident about the future of Canadian markets: “Even though housing market performance varies significantly from year to year and from region to region, it is always fortified by economic stability, political security, population growth and overall livability. In all of these areas, Canada will continue to have a global advantage. Our major cities are not only hubs for migration within Canada, but magnets for immigration, and our real estate markets continue to be safe havens for investment. In the long term, these fundamentals will support a healthy and stable Canadian housing market.”
St-Pierre thinks buyer behaviour will be driven by the baby boomer and millennial preferences. “We expect to see many baby boomers downsizing in the next ten to twenty years, so they’ll likely be looking at the condo market as well. This will free up a lot of detached single-family homes for the millennial demographic.”
He sees no slowing down in the condo trend, “We expect to see the current trend in condo building and purchasing continue to grow because condos are more affordable than single-family homes. Currently in Montreal, about 45% of new homeowners are buying a condo. Montreal, being an island, has limited available land. Therefore, condos provide a solution to the high housing demand.”
St-Pierre observes a new trend emerging in luxury home buying. “There’s an interesting trend right now with luxury homes that we expect to continue. We see more and more people building and buying high-quality functional homes with less square footage, high-end materials and integrated home technologies, rather than the extremely large, opulent properties. Sobriety in both design and size seems to be the new norm.”
In Bartle’s view, the Canadian housing market will remain strong with continued growth in the condo market. “I don’t believe we’ll see the escalating prices that we’ve experienced the past five to ten years. We know that interest rates are going to increase, keeping the prices from increasing at a rapid rate. I think the condominium market is going to remain strong due to baby boomers downsizing and the lifestyles of first-time buyers.”
We keep reading that the millennial generation is reluctant to commit. They prefer to rent rather than buy. Is that the way you see them too, and what does that mean for the future of the Canadian real estate market?
There are many theories on the spending habits of millennials and the actual numbers often tell a different story than what people would expect. St-Pierre says that millennials’ reluctance to commit to home buying is definitely not the case in his experience.
“According to the Royal LePage Peak Millennial Survey , 87% of Canadian millennials surveyed believe that home buying is a good investment, 69% hope to own a home in the next five years, and 35% already own a home. Millennials are currently the second largest demographic of home purchasers, after Gen Xers, and we expect to see their presence in the marketplace continue to grow as their large number will put additional pressure on entry-level housing. With peak millennials as a group now reaching their late 20s, the number of people aged 25 to 30 is projected to increase 17% in 2021 compared to 2016.”
Henderson believes the idea that millennials have an aversion to home ownership is misplaced. “There are a lot of misconceptions about home ownership and the millennial generation. Rather than being reluctant to commit, millennials have had to face daunting challenges in housing affordability, particularly in markets such as Vancouver and Toronto where real estate costs have escalated over the past decade. This has discouraged or delayed their entry into the housing market.”
Sotheby’s recently released Modern Family Home Ownership Trends Report ² found that 83% of young Canadians living in Canada’s largest metropolitan areas would choose to raise their families in detached homes over any other housing type if costs were not an issue, with only 5% preferring condos.
“With 9.1 million Canadian millennials now entering the partnership, marriage and parenting stages of the family life cycle – a time when home ownership becomes an even greater priority – we believe that demand for housing, and in particular, single-family homes will only increase” notes Henderson. “This will pressure several of Canada’s largest real estate markets to look for solutions to ongoing affordability challenges.”
Bartle believes it’s the post-millennial demographic – known as Gen Z – that we should be more concerned about. “The world seems to be a smaller place now, allowing millennials to travel and work globally. Having real estate debt may not be their first priority for now. I think we need to be more concerned for the generation following the millennials. For the last few years, I’ve heard parents expressing concern that their children who are millennials can’t afford a home – or can only do so at the expense of being house poor. If the millennials can’t afford to get into the real estate market, how will the next generation afford it? I don’t have a crystal ball, but I can see those children living with their parents longer. Those who can’t make that work will rent, and we’re already seeing a large increase in the rental market.”
1 The Royal LePage Peak Millennial Survey, released August 17, 2017. An online survey of 1,000 peak millennials (age 25-30), conducted between June 7 and June 14, 2017. The term “Peak Millennial” was first coined by U.S. economist, Dowell Myers to describe the largest cohort of millennials and their potential purchasing power. In Canada, the highest millennial birth rates occurred between 1987 and 1993, making those between the ages of 25 and 30 years old a sizeable, and important demographic in the Canadian residential real estate market.
2 Sotheby’s International Realty Canada, released November 2018. A new report released by Mustel Group and Sotheby’s International Realty Canada reveals the impact of rising housing costs on young families across the country’s major metropolitan real estate markets, highlighting the significant contrast between the home ownership aspirations and realities of this demographic.
Lucy Conte, Editor-in-chief
This article was published in T.E. Wealth’s Strategies newsletter, December 2018 edition. Read the full edition here.
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