Canada Will Need Multiple Rate Increases to Cool Housing Market Frenzy

Housing experts say prospective homebuyers hoping interest rate hike on March 2nd will cool the country’s heated real estate market will likely be disappointed. They believe pent-up demand for homes is so high and supply still so scarce that the Bank of Canada’s decision to hike the rate to 0.5% from 0.25% won’t take much of an edge off the real estate market.

With the Canadian economy continuing to grow and inflation soaring well above the central bank’s target of 2%, the bank’s governing council said it expects interest rates will need to rise further. However, the central bank did not indicate when it would raise rates again. 

Bank of Montreal chief economist Douglas Porter said it is unlikely that the rate hike will have any significant impact on a housing market with as much momentum as Canada’s. “I suspect rate hikes would really begin to bite when we get to 100 basis points,” he said.

Toronto broker Michelle Gilbert says her clients aren’t letting the rate hike deter them from buying because they’ve lived through years of home price increases and interest rates are still lower than they were pre-pandemic. Gillbert says clients want to get into the market while they can, and they won’t find better conditions until there’s a significant rise in supply or investors are required to cover higher down payments, deterring them from buying.

Gilbert’s views are bolstered by a Zoocasa analysis showing the country’s last round of interest rate increases between the start of 2017 and end of 2019 correlated with slower sales numbers, but triggered no major impact on prices. The listings site found after those rate hikes there were “very small movements” in the average price, which could be attributed back to seasonality and the new mortgage stress test rather than the rate increase.

Source: Globe and Mail
Source: The Star

B.C. Real Estate Association Criticizes Cooling-Off Period for Housing

The British Columbia Real Estate Association says a cooling-off period the province is looking to introduce will not take the edge off the market’s heated conditions. The proposed legislation is slated to be introduced this spring and will give homebuyers a window to back out of deal for a property with no or diminished legal consequences.

But the association, which represents 24,000 B.C. realtors, said that an analysis it conducted of similar cooling-off periods in other global jurisdictions has shown the policy to be “ineffectual at best.”

“While attractive at first blush, in a market characterized by low supply, such as ours, we believe that a cooling-off period will cause more problems than it solves,” said the association’s chief executive, Darlene Hyde, at a press conference. “We are concerned that not enough attention was paid to the possible unintended consequences, such as the uncertainty for sellers who may be involved in another transaction, worsening affordability, an increase in frivolous offers and numerous other factors.” She added the cooling-off policy was proposed without ample industry and consumer consultation and called on the government to take a “less prescriptive approach.”

In an e-mail to The Canadian Press, Finance Minister Selina Robinson said she’s still intent on pursuing cooling-off legislation because she wants to ensure “buyers have time to get the information they need to make a sound decision that is right for them.” She pointed out the real estate industry’s commission-based nature means the association has a vested interest in keeping the market hot.

Those remarks came as BCREA released a white paper containing 30 recommendations for addressing the bidding wars, supply scarcity and soaring prices Hyde feels created an “untenable situation.” Earlier in February, the Real Estate Board of Greater Vancouver said a lack of supply caused January home sales to slow from a record-setting pace in 2021, nonetheless pushing the benchmark price up 18.5% from January 2021, to about $1.2-million.

Ms. Hyde estimates the province is 25,000 listings short of what is needed for a balanced market and said the lack of supply may be further exacerbated by the 70,000 to 80,000 immigrants B.C. expects this year.

The association wants to see the province tackle these conditions by introducing a mandatory “pre-offer period” that will block offers from being made at least five business days after a property is first listed, so prospective buyers have enough time to research a home.

BCREA also wants the province to bring more transparency to the homebuying process, so people can make more informed decisions, when they are caught in multiple offer scenarios. BCREA envisions this working like Ontario’s Stronger Protection for Ontario Consumers Act, which prevents listing brokerages from indicating they have an offer unless they receive a form declaring an offer has been signed. The act requires brokerages to keep copies of all written offers to the seller and counter offers, and allows buyers who made offers to request a regulator validate the number of offers presented.

BCREA likes these processes instead of restricting blind bidding, a process where prospective buyers don’t get to see details contained in competing bids for homes they make an offer on. The federal government plans to ban blind bidding and B.C. is investigating the process too.

However, critics have doubts about whether it can alleviate supply constraints and high prices because of what they’ve seen in other markets. BCREA, for example, points out that Sweden does not permit blind bidding, but has experienced even faster home-price growth during the pandemic than Canada, and comparable home price growth over the previous 20 years.

The association also wants the province to give more information to people considering moving to strata housing, where people purchase a portion of a property rather than the entire building. More than 1.5 million British Columbians live in strata housing. BCREA thinks documents – strata bylaws, depreciation reports, information on contingency reserve funds and copies of insurance paperwork – should be made available with listings.

While Ms. Hermary appreciates BCREA’s suggestions, she believes supply is the way forward. “Until we really deal with the fact that we’re not building enough and we’re not really having a conversation around how to create more land … we’re not really able to find solutions that are going to work long-term.”

Source: Globe and Mail

Buyer Fatigue Already Cooling Housing Market

John Pasalis, president of Realosophy Realty Inc., spoke with Financial Post’s Larysa Harapyn about buyer fatigue cooling Canada’s housing market. Here are some of the highlights:

House prices have accelerated rapidly, and buyers are losing out in bidding wars which leads to some pulling out of the market. And although it still a sellers market, more properties are being listed which also helps to spread the demand. 

Canada’s population is growing faster than homes are being built and many believe that affordability will not improve until more homes are built. However, John Pasalis does not feel that the lack of supply is the only factor here. He says that there is a level of panic in the market with buyers believing they need to act now before they are priced out and that is fuelling the increase in housing prices. 

What can bring that exuberance back into check? Pasalis says this comes down to a shift in beliefs and behaviours from buyers. When the market starts to slow down, buyers get fatigued, more listings hit the market and then prices start to plateau. This helps buyers feel less anxious about making the purchase. 

Right now sales and listings are below 2021. The data will seem misleading for a few months though because there was explosive demand in 2021. But looking at new listings compared to historical averages, the numbers are quite strong. Sales are still competitive, but some pressure is coming off as more listings hit the market. 

What will rising interest rates mean for the market? Thanks to the stress test, rate changes will not have a material impact on the amount buyers qualify to borrow, however it may lower what buyers are willing to borrow. If there are four rate hikes, a full percentage point by the end of the year, this could have a big impact. This will likely cause demand from investors to slow and even end-users will also pull back due to increased mortgage costs. 

Pasalis believes that house prices have to plateau. There has been unbelievably rapid growth and at some point buyers won’t be able to afford any more. He expects that it will happen sometime this year which will lead to a levelling off of prices. 

Watch the full video on the Financial Post website.
Source: Financial Post

Price of New-Construction Homes Dropped $60,000 in January, New BILD Report Says

The price of new construction homes in the Toronto region moderated slightly in January compared to December, as condo sales hit a record high while the supply of single-family houses continued to dwindle. The benchmark price of a single-family home soared 30% year-over-year in January to $1.77 million — but was down nearly $60,000 from December’s benchmark, according to the homebuilders’ association.

The 579 townhomes, semi-detached and detached houses that sold in January was a 67% annual decline from January 2021, and 33% beneath the 10-year average, the Building Industry and Land Development Association (BILD) reported.

Meantime, the launch of nine new condo projects saw those sales hit a January record of 2,274 highrise, midrise and stacked townhouse units — more than double the 10-year average and 232% above sales in January 2021. The benchmark price for a new construction condo climbed about 13% year-over-year to $1.15 million, about $33,000 below December’s benchmark, said the report.

There were only 550 single-family homes on the market at the end of January in the pre-construction, under-construction and newly built stages. That was about 10% below pre-pandemic levels and well below the 15,000 houses per month that were typical of the 2000-2009 decade.

“What we’re seeing is smaller and smaller releases on single-family (units) just based on the availability of serviced land in the GTA,” said BILD senior vice-president Justin Sherwood. Although there will be some new supply in the spring, those smaller project releases are likely to continue as “land supply is tight just about everywhere,” he said.

“You just have to take a look at the single-family inventory levels. It’s 550. A decade ago it was 5,000. Two decades ago it was upwards of 20,000 in any given month,” said Sherwood. “In general, supply is a third in aggregate what it should be and for single-family it’s non-existent.”

January’s new condo project launches helped increase the inventory of those units slightly from December. But it still leaves only 2.9 months of supply based on average sales for the past 12 months, said Ed Jegg, analytics team leader at Altus Group, which compiles the industry statistics. A balanced market would have 9 to 12 months’ supply, he said. Instead, inventory has fallen to about half the level of availability in 2011-2016.

The average condo was priced at $1,243 per square foot and the average unit size was 926 square foot.

Source: The Star

Statistics Canada Releases Building Permits for January 2022

The total value of building permits decreased 8.8% to $10.1 billion in January. The residential sector fell 11.6% to $6.7 billion, while the non-residential sector declined 2.7% to $3.4 billion. On a constant dollar basis (2012=100) the total value of building permits declined 8.2%.

Residential sector pulled down by multi-family building intentions

The majority of the drop in the residential sector was in the multi-family component (-18.5%), while intentions for single family homes decreased by 3.8%. Most of the declines for January were in Ontario and British Columbia.

Non-residential sector pulled down by commercial component

The commercial component decreased by 10.2% in January, pulling the non-residential sector lower. Ontario and British Columbia reported the largest declines in this sector. In British Columbia, the decline signified a return to more normal levels following a strong December.

Nationally, the decline in commercial construction intentions was partially offset by a 15.2% increase in the industrial component. Construction intentions in the institutional component (-2.6%) were slightly lower in January compared with the value in December. Declines in six provinces were mostly offset by strong growth in Ontario (+68.4%), reflecting a $102 million nursing home permit issued in North Bay.

Nationally, the non-residential sector was down 2.7%.

Source: Statistics Canada