Moody’s Analytics maintains the Toronto and Vancouver home prices could drop by as much as 60% in the coming years
Brace yourself for five years of glacial growth in Canada?s housing market, Moody?s warns
Garry Marr
The Vancouver Sun
Single-family house prices may be overvalued by as much as 60 per cent in Toronto, but cooling measures may take a bigger bite out of markets away from the country’s largest metro area, says a new report.
Moody’s Analytics maintains the brakes are being put on the housing market across the country and Canadians need to prepare for “several years of retrenchment” with at most as 1.3 per cent annual price growth per year over the next half a decade.
“Exact turning points are difficult to predict, but the combination of restricted mortgage lending, taxes on foreign purchases in the largest metro areas, and the expectation of higher mortgage rates means that house prices are likely to experience a slowdown in the next few years, especially if speculative home purchases in Toronto and Vancouver are reduced or shut down,” writes Andres Carbacho-Burgos, in the eight page report, released Tuesday.
Meanwhile, ratings agency DBRS said in a report Tuesday that booming housing markets in British Columbia and Ontario boosted job growth over the past decade in sectors such as construction, home-related retail and real estate by 28 per cent — faster than other parts of Canada. DBRS said if house prices fall dramatically, other sectors of the economy should be able to absorb those jobs thanks to strong economic growth and steady population gains.
In the past two months, the Bank of Canada has raised the overnight lending rate 50 basis points, while the prime lending rate at most financial institutions has jumped from 2.7 per cent to 3.2 per cent. Long-term rates have also been trending upwards, and some suggest the central bank is not done and will raise rates another 25 basis points in October.
“Affordability as measured by the median dwelling price to median family income ratio is also close to a record low, so it is hard to see house prices maintaining the same momentum as before,” the Moody’s report states.
Consumers with insured loans backed by Ottawa have faced tougher lending restrictions for about the past year but the Office of the Superintendent of Financial Institutions is now looking into cracking down on non-insured mortgage loans, the portion of the market with 20 per cent or more equity in their own home.
Moody’s Analytics does say the effects of tougher lending standards, higher mortgage rates and policy interventions from provincial governments will make reactions uneven across the country.
“Greater Toronto is likely to maintain moderate house price growth, while the more policy-restricted market in Vancouver will lead to prices holding steady in coming years,” the report says.
Average sale prices in the Greater Toronto Area have dropped almost 25 per cent from April, according to the Toronto Real Estate Board’s last set of results for August. That slide coincides with provincial efforts to slow the housing market down, including a province-wide extension of rent control increases that are now tied to inflation and a 15 per cent tax aimed at foreign buyers.
“Although inflows of wealth and real estate speculation get most of the blame for increased overvaluation and reduced housing affordability in Toronto and Vancouver, excess demand is a more permanent culprit,” Moody’s said.
“Household formations in Toronto and Vancouver, as well as in Toronto’s satellite metro areas like Guelph and Oshawa, have exceeded the national rate of household formation for some years now, and residential construction in these two metro areas has failed to keep up.”
In the census metro area for Toronto, Moody’s said it can see average annualized price growth of 10.7 per cent from the third quarter of 2017 to second quarter of 2018. It sees an another 8.5 per cent of annualized growth from third quarter of 2018 to the second quarter of 2019.
The Vancouver census area picture is not as rosy with annualized price increase from the third quarter of 2017 to the second quarter of 2018 of only 1.1 per cent. The following year will see prices drop 1.7 per cent in the Vancouver area.
Moody’s composite house index says national prices will rise 6.8 per cent in 2017, but drop 0.1 per cent in 2018, rise one per cent in 2019 and then 1.3 per cent per year for 2020, 2021 and 2022.
The report suggests Toronto has not been left unscathed by regulatory and interest rate changes, but has withstood the moves better than the national market.
“The more restrictive environment means that prices will grow at a much smaller rate: A decline from 27 per cent growth in the second quarter to only 11 per cent in the subsequent year for Toronto is no slight accomplishment, and there will be significant slowdowns in the neighbouring metro areas as well,” says Moody’s.
“Outside of Ontario with its tight demographic situation and higher average median income, the combination of rising interest rates, more restrictive mortgage regulations, and increasing provincial restrictions such as the Vancouver transfer tax creates a bleak short-term outlook for
house prices.”
© 2017 Financial Post