Canada’s housing market faces biggest test since 1990s recession

Canada’s housing market is in “recessionary” territory, and it’s going to get worse before it gets better, economists warned this week. Home sales that reached a peak of 64,000 in early 2021 are now down 45%, said Canadian Imperial Bank of Canada’s housing market outlook. That’s 12% below their pre-pandemic 10-year average.

The picture looks even bleaker when viewed by population with per capita sales at lows not seen since the 2008 recession.

“The housing market in Canada is in recessionary territory, as it faces its most significant test since the 1991 recession,” said CIBC economists Benjamin Tal and Katherine Judge. “And activity will deteriorate further into the first half of 2024 as interest rates remain elevated, and supply floods the market.”

So far prices have not suffered as much as sales. The benchmark home price is down only 11% from the 2022 peak and is still 38% above pre-pandemic levels, said the report.

What has shielded prices is a lack of new listings in the market. From early 2022 to early 2023, new listings fell 31% and fewer homes coming on the market helped to stem the decline in prices.

But that is changing, CIBC said. New listings have been climbing in recent months, rising 31% from the low in March 2023. “That surge in part reflects increased distress sales as owners list their properties due to financing issues as mortgages payments increase rapidly,” the economists said.

More listings and fewer sales has national housing headed for a buyers’ market — Toronto is already there, they said. But this is unlikely to draw buyers off the sidelines because elevated mortgage rates are keeping costs high.

“With listings on an upward trajectory, and demand from strong population growth and a relatively tight labour market eroded by high interest rates, housing market activity will continue to deteriorate,” Tal and Judge said. Home sales could fall another 10% to 15% by the end of the first quarter of 2024 and probably won’t rebound to pre-pandemic levels until early to mid-2025, CIBC said.

CIBC’s outlook comes as economists at Toronto-Dominion Bank say they expect home prices to fall twice as much as they had thought. TD had been predicting average prices would fall 5% through the first quarter of 2024, but on Nov. 22 they increased that decline to 10%, Bloomberg reports.

TD expects higher bond yields will cause fixed-mortgage rates to rise, shutting more buyers out of the market. The buyers who remain will have more bargaining power to negotiate lower prices.

Recession appears to be weighing on Canadians’ minds, much more than their American neighbours. November saw a big spike in Canadians typing the word “recession” into internet search engines, according to the November 23 chart from National Bank of Canada. Understandably — gross domestic product in this country has stalled over the past six months and the unemployment rate has risen 0.7%. In the United States, meanwhile, GDP has surged to 4.9%.

“While recent developments could escape the recession label, Canadians seem concerned about the situation currently prevailing in the country, especially given recent mass layoffs,” said National Bank economists Alexandra Ducharme and Matthieu Arseneau.

But be careful what you search for. “It is well documented that a recession can be self-fulfilling, in the sense that it is all the more likely to occur when people feel they are in one and begin to adjust their behaviour accordingly,” said the economists.

Source: Financial Post

In Canada’s housing market, it matters who your parents are

Getting on the property ladder is so tough these days more young Canadians despair of ever getting to the first rung. Prices have cooled since the pandemic housing boom, but higher mortgage rates are a new hurdle for would-be buyers.

The average selling price of a home in Canada in October was $656,625, up 1.8% from a year ago. The average price in Toronto hit $1,125,928 last month, and in Vancouver it reached $1,196,500.

A new study by Statistics Canada has found that some Canadians have an advantage for getting on that ladder over others — their parents. The study, according to the agency, provides the first detailed analysis of the relationship between parents who own property and the likelihood of their children owning a home, using tax data and data from the Canadian Housing Statistics Program.

It found that adult children born in the 1990s whose parents were homeowners were twice as likely to own a home than those whose parents were not homeowners. Children of homeowners had a homeownership rate of 17.4%, compared with a homeownership rate of 8.1% for the children of parents who did not own a home. The homeownership rate of children whose parents owned more than one property was even higher at 23.8%, nearly triple the rate of the children of non-homeowners.

“The analysis establishes a robust positive relationship between parents’ property ownership and the likelihood of homeownership for their adult children, even when controlling for income, age and province of residence,” said authors Michael Mirdamadi and Aisha Khalid. “Inequality of homeownership appears to be reproduced across generations as parents’ property ownership conveys significant financial advantages to their children.”

The study also found “significant differences” between the average income of the adult children who owned a home and those who did not. The average income of non-owners was $36,000, while homeowners had an average income of $65,000. The average income of adult children with parents who owned multiple properties was about $6,000 higher than those of non-homeowners.

Where you live also makes a difference. Canadians born in the 1990s had the highest rates of homeownership in New Brunswick at 20.5% and the lowest in British Columbia at 14.1%, reflecting that region’s high property prices. The gain from parental property ownership to the homeownership rate was also highest in Ontario and British Columbia.

“This may signal that in housing markets with higher property values, where higher incomes are necessary for ownership, parents’ property ownership or wealth plays a larger role in their adult children’s homeownership outcomes,” said the study.

Growing unaffordability of housing in Canada has increased younger generations’ reliance on the so-called bank of mom and dad. Statistics Canada cites a CIBC study that showed between 2015 and 2021, the share of first-time buyers who received a financial gift from family rose from 20% to 28%, and the average amount of the gift rose from $50,000 to $80,000.

Source: Financial Post
Source: Globe and Mail

Don’t count on seniors to sell their homes anytime soon, CMHC report finds

Canadian seniors are opting to remain in their homes for longer, a new report from the Canada Mortgage and Housing Corporation has found, suggesting that those looking to buy into the housing market should not expect a flood of supply from elderly homeowners any time soon.

The report, released by the CMHC Nov. 15, tracked the housing habits of different cohorts of Canadians, divided into five-year increments, starting with those born between 1917 and 1921. Significantly, it included the first group of baby boomers, those born between 1947 and 1951, who would have been 70 and 74 years old at the time of 2021 census and bear an outsized demographic impact.

The report found the percentage of Canadians aged 75 and older who sold their homes fell steadily to 36% between 2016 and 2021, down from 41.6% between 1991 and 1996. Currently, the sell rate among the 75-79 age group, just outside the first boomer wave, is 21.5%.

The figures suggest the housing market will have to wait for when this cohort hits their 80s — when the sell rate hits 36.6% for those aged 80 to 84 — to see supply enter the market.

“In Canada, the proportion of elderly households who sell their property is elevated only in relatively advanced age groups,” the report found. “It will therefore take another few years to see a truly significant proportion of elderly households list their properties for sale.”

Canada’s population is on the verge of a major demographic shift with the number of older households poised to rise “significantly” over the coming years. Meanwhile, the country is experiencing a severe housing shortage, with the CMHC estimating the country needs to build an additional 3.5 million homes on top of current construction rates by 2030 to close the affordability gap.

The housing options older Canadians chose will have spillover effects into the market, CMHC noted. If they opt to stay in place longer that means there will be fewer single family home available for younger generations. But moving to a condo and or rental could also increase the prices of those forms of housing, adding to affordability issues for people in lower economic groups.

While condominiums are becoming more popular with seniors, the CMHC found that “actual movement toward this type of housing is quite limited.” In 2011, out of all owner households in Canada in the 65-to-69 age group 12.3% had a condominium. A decade later, condominium ownership rose to 17.4% among the same group now aged 75-79.

“These results therefore suggest that condominiums become more attractive to Canadian owner households as they get older. This being said, the movement toward condominiums seems limited, since the proportion of condominium owners rises only a few percentage points over 10 years,” the report said.

The number of people who rent, meanwhile, rises with age, but the trend is less pronounced among younger seniors.

Further, only a “minority” of older Canadian households are opting to downsize.

Among the reasons cited for the slow rate of downsizing include the fact that Canadians are living longer and healthier lives, seniors have more money than previous age groups and are less likely to need to sell to finance their old age, and homeowners have more housing types to chose from.

For example, 12.1% of people aged 60-64 in 2021 owned a one-bedroom home, up from 10% in 2011 at the age of 50-54. Almost one quarter of the 60-64-year-olds in 2021 owned a two-bedroom compared with 21.1% of those aged 50-54 in 2011. The biggest drop in downsizing was recorded in the four-bedroom home category where ownership fell 3.5% points in 2021 from 2011.

Source: Financial Post

TD says home prices to fall 10%, double previous forecast

Canadian home prices are likely to fall twice as much as previously expected, according to economists at Toronto-Dominion Bank, as persistently high borrowing costs and an unexpected surge in listings puts more downward pressure on the market.

As recently as October, TD’s team was predicting average home prices would decline 5% through the first quarter of 2024, a call they first made in September. They’ve now changed the forecasted drop to 10%, they said in a research note on November 22.

The gloomier forecast comes as the highest interest rates in decades have cleared many buyers from Canada’s housing market, while putting more pressure on mortgage holders. The result has been an increase in the number of homes up for sale since the middle of the year, and a slide in benchmark home prices since September.

Persistently high inflation has caused TD to hike its forecast for bond yields. As that translates into still-higher fixed mortgage rates, more prospective buyers could be squeezed out. Those who remain, will have more negotiating power because of the surge in new listings.

In Ontario, the country’s most populous province, for instance, TD found one measure of supply and demand, the sales-to-new listings ratio, had fallen to 39% in October from 63% in May, indicating more pressure on prices could come.

The economists said, however, that even the greater-than-expected price decline would still leave Canada’s average home prices 15% higher than pre-pandemic levels. And with the TD economists — and the broader market — forecasting the Bank of Canada will begin cutting interest rates by the middle of next year, they say that should prevent steeper declines.

Source: Financial Post