Home prices in the Greater Toronto Area expected to increase 6.8% in 2018
- Impact of new stress test expected to be contained to first half of 2018 for most major markets
- Still risk of high price appreciation in Greater Toronto Area and Greater Vancouver as chance of market correction fades
- Compounding policies could have unintended consequences for struggling housing markets
According to the Royal LePage Market Survey Forecast released last week, the Royal LePage House Price Composite, which measures home prices in 53 key Canadian cities, is expected to increase 4.9 per cent by the end of 2018 to $661,919, in the face of a series of measures aimed at affordability challenges in Greater Vancouver and the Greater Toronto Area.
One of the most significant regulatory interventions in the housing industry in years is the incoming Office of the Superintendent of Financial Institutions (OSFI) mortgage financing stress test, which will take effect on January 1, 2018. The stress test targets existing and prospective homeowners applying for a mortgage, requiring them to meet stricter criteria when seeking new financing.
With a large number of existing homeowners potentially failing the test when refinancing next year, a temporary reduction in consumer confidence may further stagnate price growth as potential buyers and sellers take a ‘wait and see’ approach. Moreover, some potential move-up buyers will likely delay listing their homes as they will not be able to access sufficient financing for their desired next purchase. With further diminished affordability, it is likely that demand for entry-level properties will surge. In most urban centres, this will be most evident in the condominium segment.
“It is prudent that policy makers introduce measures that help protect the housing market from runaway price inflation,” said Phil Soper, president and CEO, Royal LePage, “However, natural supply and demand forces will always triumph over regulatory tinkering. Attempting to use public policy to steer property prices in huge, rapidly growing cities like Toronto and Vancouver is like a tugboat trying to turn an ocean liner. Consistent, measured policy can have a positive impact. Just don’t try to turn the market on a dime or you risk sinking the ship.”
“Insufficient housing supply in Canada’s largest cities will begin to drive significant price increases to higher than normal levels once the market adjusts to the new stress test,” continued Soper. “Aggressive home price inflation is still more of a threat today than the risk of a market crash in Toronto or Vancouver. On the other side of the coin, regions where demand is soft and already struggling to absorb the supply of homes for sale may have difficulty adjusting to these measures.”
Decreasing, or already low, inventory levels are expected to continue to define market characteristics of many large urban centres including the Greater Toronto Area, Greater Vancouver, Ottawa and Montreal. Further adding to the already bloated housing demand backlog, British Columbia and Ontario both experienced a surge in interprovincial migration in 2017, putting increased pressure on Greater Vancouver and the Greater Toronto Area housing markets. Demand from immigration, alongside demand from Peak Millennials who are increasingly becoming of homebuying age, will continue to outpace supply.
“Royal LePage’s research into Peak Millennials shows that younger Canadians desire to own their own homes with the same conviction as their parents before them,” said Soper. “Eighty-seven per cent see real estate as a good financial investment. The tight rental market is reflective of their dreams sitting on hold while they save for a downpayment. Of course there will be those who are priced out of a market altogether. They will continue renting and this will drive demand for investor properties.”
According to a recent Royal LePage Advisor Survey on rental demand, 76 per cent of Royal LePage agents who offer rental services in the Greater Toronto Area saw a year-over-year increase in multiple offers and 68 per cent of those respondents cited affordability as a barrier to homeownership as the number one factor driving rental demand. In Greater Vancouver, 59 per cent of respondents servicing the Vancouver area saw a year-over-year increase in multiple offers for rentals. As a result, the pipeline of potential homebuyers providing a market price floor is growing and this growth trend is expected to continue through 2018.
Canada’s economy is expected to expand by 2.1 per cent in 2018, with all provinces, with the exception of Newfoundland, expected to see growth. Economic growth is an important driver of healthy housing markets.
“Most Canadians know how important the resource sector is to our economy but fewer understand just how important the real estate industry is to Canada,” said Soper. “In 2016, 13 per cent of the country’s GDP was driven by real estate. In British Columbia, that number was closer to 18 per cent.”
“When people are confident about their jobs and optimistic about the health of their country and their city, they will invest in a home,” Soper concluded. “At projected levels of demand, Canadian housing is poised for growth for years to come.”
Greater Toronto Area Market Pricing Forecast
Home prices in the Greater Toronto Area are expected to increase 6.8 per cent in 2018, rising to an aggregate price of $901,392. This will largely be driven by price appreciation in the condominium market as demand for entry-level properties is expected to continue to surge. The Greater Toronto Area’s thriving economy and growing population has been supportive of an expanding housing market and this is expected to continue throughout 2018.
As a result of the incoming OSFI stress test, sales for detached properties are expected to soften in the first half of the year as both buyers and sellers adjust their price expectations. However, sales volumes for the full year are expected to remain at a similar pace as 2017.
“Relative to recent years, 2018 is expected to be a good year for buyers and this is a continuation from what we are currently seeing in the market today,” said Shawn Zigelstein, sales representative, Royal LePage Your Community Realty. “While the condo market should continue to see price growth from high demand, buyers looking at detached properties in the first quarter will be able to ask for conditions, have a much greater selection and should be competing against fewer multiple offers.”
*Data presented in the table above may not match same period data reported previously due to subsequent market updates.
About the Royal LePage Market Survey Forecast
The Royal LePage Market Survey Forecast provides year-over-year price expectations for Canada’s nine largest markets. Housing values are based on the Royal LePage National House Price Composite, produced through the use of company data in addition to data and analytics from its sister company, RPS Real Property Solutions, the trusted source for residential real estate intelligence and analytics in Canada. Commentary on housing and forecast values are provided by Royal LePage residential real estate experts, based on their opinions and market knowledge.
About Royal LePage
Serving Canadians since 1913, Royal LePage is the country’s leading provider of services to real estate brokerages, with a network of over 17,000 real estate professionals in more than 600 locations nationwide. Royal LePage is the only Canadian real estate company to have its own charitable foundation, the Royal LePage Shelter Foundation, dedicated to supporting women’s and children’s shelters and educational programs aimed at ending domestic violence. Royal LePage is a Brookfield Real Estate Services Inc. company, a TSX-listed corporation trading under the symbol TSX:BRE.
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