There has been a great deal written about the Canadian real estate market and whether the market is going to tank or have what economists call a hard correction. The experts, normally economists, look at a variety of factors in the economy and give their best estimation on what may happen to a particular market segment. In this blog, we are going to simply look at real estate.
- One Size Does Not Fit All: Supply and demand are the key components to any economic analysis. How much housing stock is in one particular (supply) area, and what is the demand for it? The reality is that housing correction will not affect all areas in the province of Ontario the same. If you live in an area where there is not a great deal of housing starts (new housing being built) or stock to purchase, you will more than likely not see a hard correction. For example, Windsor, Ontario, has been experiencing a robust housing market. There are multiple offers, and most homes are going for more than the asking price. However, Windsor went through a sharp economic downturn in 2008, and housing starts were virtually non-existent for a long period of time. As Windsor’s economy has rebounded, the demand for housing has increased and, even with the new stress test, it appears to be holding.
- Personal Debt: There is no doubt a number of people have been taking advantage of borrowing cheap money, and the average person’s personal debt is between $124,700 and $157,700 (Stats Canada) in Ontario, which includes real estate debt. In view of this, the federal government made the conscious choice of implementing a stress test. If you cannot afford a mortgage at 5.14 percent interest rate amortized over twenty-five years, you will not qualify for a traditional mortgage. It appears this has actually slowed down purchases and dipped prices in housing in the Greater Toronto Area (GTA) by 4.1 percent (Toronto Star, February 6, 2018). Canadian personal debt is a significant concern and will likely drive government policy in the near future to keep people from borrowing more money.
- Foreign Investment: In the GTA, Ottawa, and Vancouver regions, foreign investors have been actively purchasing Canadian real estate. Canadian real estate is largely viewed as an excellent investment due to the stable government, healthy economy, and reasonable tax rates. However, the government both in B.C. and Ontario felt that these investors were having too much of an impact on the housing market by creating more demand than what the supply can keep up with. In Ontario, this is limited to the Golden Horse Shoe area (i.e., GTA, Hamilton, and Niagara regions). A 15 percent tax was levied on foreign buyers, which cooled the housing markets in Markham and Richmond Hill. Further, the housing market in Vancouver cooled when the foreign tax was implemented.
- Inflation: The central bank of Canada (Bank of Canada) determines the interest rate. They have been increasing interest rates since 2017. Why? The governor of the Bank of Canada hopes to stop inflation. Inflation means that the general level of prices are going up. It will cost more money to buy products. To stop this, the governor general raises interest rates. Canada had our last increase in January, and we were spared an increase in March due to poor jobs number and uncertainty created by President Donald Trump in the United States when he decided to impose tariffs. However, if things stabilize with a new NAFTA agreement or President Trump exempts Canada in the long term from the tariffs, we can probably expect to see another rate increase in July. When interest rates rise, mortgage payments rise, and this will make it more difficult for people to borrow money, which may slow down the housing market.
So I really haven’t answered whether there will be a hard market correction. I don’t think so . . . but I could be totally wrong. Here is why I don’t think I’m completely wrong.
- The government has been doing everything in its power to slow the housing market. It has largely accomplished this task. It also can reverse policies if its programs are dragging the economy down.
- Non-conventional mortgages mean you have borrowed 81 percent plus. These are insured by CMHC or Genworth, which protects the real estate market from any severe corrections.
- The sub-prime market has just started to recover from the 2008 housing crash, and the majority of borrowers do not have mortgages from this marketplace.
- The government can force the governor of the Bank of Canada to reduce interest rates. This is not a popular move by any sitting government; however, it is an option.
There is no assurance that the real estate market will stay steady, and you should have a mortgage that has always made sense for your circumstances. If you invest in mortgages, it should be balanced with your portfolio.
My best advice? Pay off your credit cards and start living within your means . . . and market correction will not affect you.