Falling prices throughout Canada may attract more property buyers

As per recent reports, falling prices throughout Canada may eventually draw more property buyers into the market as per experts. Canada has been witnessing a steady decline in property prices across major cities and regions and this naturally makes real estate more affordable for first-time buyers and fence-sitters, something that will eventually lead to higher sales volumes and price growth in the long term as opined by experts. Home prices have come down in several parts of Canada which were overheated in recent times as per several studies and reports. CMHC (Canada Mortgage and Housing Corporation) has stated that the real estate market continues to have some degree of vulnerability although prices have fallen.

Declines in prices for the third quarter as seen in Victoria and Toronto, according to the CMHC are not enough to remove the tag of vulnerability owing to affordability concerns. However, things may change soon enough according to the agency. Overbuilding and overheating trends should remain on the lower side according to CMHC and the price accelerated may be down-marked in the next few reports and this may lead to the vulnerability tag coming down to moderate from high in case other Housing Market Assessment (HMA) aspects do not change. CMHC has highlighted the trends in Vancouver in spite of prices and sales volumes coming down in recent times.

The overall imbalances in the market in Metro Vancouver have eased out over the last few quarters according to CMHC but the price levels for homes are still quite high on account of local economic aspects and this has led to overvaluation being found out by the agency. Moderate overvaluation has also been observed by the agency in Toronto and Hamilton. In the GTA (Greater Toronto Area), overvaluation has transformed to moderate from high in order to the gap coming down between price levels worked out through fundamental aspects and the actual prices in the market.

As of Q3 2018, growth of average home prices was moderate and so was the growth in personal disposable incomes. However, the population of young adults increased by 3.68% while economic growth ensured full employment levels. Yet, there are silver linings in the clouds as noted by CMHC and several other agencies. The vulnerable state of the market is reducing and the realty market in Canada may actually stabilize over the next few quarters in 2019. This is because of stable and more reasonable prices and higher levels of affordability for homebuyers. This will naturally bring sales volumes back on an even keel, leading to ultimate price growth in the longer term although the pace of price growth will be initially on the slower side. This ushers in hope for both end users and investors who wish to snap up prime Canadian real estate at considerably lower prices.

For Toronto, the overvaluation pressure has come down which is a good sign overall for the first-time buyer and growth in prices has moderated to a large extent and the prices are thus not going up as swiftly as they were previously. However, the market fundamentals are still showing growth at a decent rate which includes population levels, employment levels and overall economic progress and growth. As a result, the fundamentals and home prices are closer to each other this time around as opined by market experts. Overvaluation, according to the CMHC, does not really have a lot to do in terms of overall market affordability. Prices may be in sync with fundamental factors in Toronto but affordability challenges will persist since Toronto’s economic progress and commercial realty boom will continue.

CREA (Canadian Real Estate Association) has previously reported that national home sales have reduced by 19% in December 2018 (year-on-year). This could be due to the impact of the mortgage stress test as per some experts. The stress test has been made compulsory by the Office of the Superintendent of Financial Institutions. This was implemented last year and led to a massive cooling of the real estate market throughout Canada, specifically in Vancouver and Toronto.

These regulations necessitate proof from buyers that they can repay uninsured home mortgages at qualifying rates which are higher than the contractual rate plus an added two percentage points or even the 5-year benchmark rate that has been released by the Bank of Canada. The maximum amount that can be borrowed has also been lowered accordingly. TREB has already urged the authorities to review this stress test in situations where there is already a higher rate of interest. Several experts have also called for a review of the law. Housing activity has been moderate across several housing markets in the country ever since the implementation of the stress test. However, the market has been ticking steadily due to economic growth and other positive factors including population and employment increases.

There has also been a suggestion to scale up the present amortization period for mortgages from 25 years to 30 years, particularly in case of first-time home buyers in order to usher in more affordability. However, Toronto and the GTA has been posting steady economic and business growth, something that has sparked heady growth in its commercial realty space. This will naturally rub off well on the residential segment as well. Additionally, with lower prices throughout the country, more buyers and investors will be drawn to real estate. This will eventually drive up sales volumes throughout Canada and prices will ultimately start increasing again, albeit at a more balanced pace according to market experts.