Six years ago if someone had told me Canada’s housing market would still be on a bull run in 2015, I would have called him or her crazy. Well, here we are; six years after the financial crisis that brought the U.S. housing and global stock markets to a screeching halt and sent Canada’s economy stumbling, Canadian real estate prices continue to surge forward. In fact, growth is still so strong that the Canadian Real Estate Association (CREA) has revised it’s 2015 outlook, predicting sales and home prices will climb further across the country.
Here’s what homeowners, and buyers, should keep in mind as the new year commences.
Everything Hinges on Low Rates
There’s no secret low interest rates are the reason real estate prices are so hot. In its revised report CREA says, “With mortgage rates remaining at historic lows since the summer, activity has remained stronger for longer than previously expected and has yet to show clear signs of fading.”
As long as rates stay low Canadians can reasonably expect home prices to climb. The Bank of Canada is now showing signs an interest rate hike could come as early as the end of 2015; home buyers do risk losing immediate value if they time their purchase incorrectly. Next year, the usually busy spring market may see the peak of home prices in Canada for the medium term. As soon as rates rise home prices will soften immediately.
Big Growth Still in Big Cities
CREA is forecasting the average selling price of a home in Canada will “edge higher by 0.9 per cent in 2015 to $409,300.” The majority of the increases will be supported by home values in Canada biggest urban centres, Toronto, Vancouver and Calgary. In fact, as of November 2014, CREA reports that growth in Calgary year over year is +8.53 per cent, Greater Toronto +7.73 per cent, and Greater Vancouver +5.69 per cent. CREA says Ontario and BC “together account for more than half of national activity and are responsible for much of the upward revision to projected and forecast national sales.”
This indicates while the rise will affect the overall average, for Canadians living outside of big city centres the price increase may not affect them at all.
CREA Is Not Listening to the Bank of Canada
In its latest Financial System Review, the Bank of Canada warned Canada’s housing market could be overvalued by 10-30 per cent. The Bank is most concerned with the rise of the condo market and the added risk of growing consumer debt levels. These two factors, combined with a interest rate hike, could lead to a softening in home prices down the road as less people are able to afford their debt and the supply of condo units outpaces demand.
In the review The Bank says, “In Toronto, the elevated level of units under construction suggests the risk of an impending overbuild, particularly in multiple-unit dwellings. Investors have played a large role in the Toronto condominium market.” The Bank indicates the softening of home values has already started in Eastern Canada. CREA’s estimates, albeit modest, seem to ignore the more dramatic decrease the Bank is forecasting.
Let’s Put It Into Perspective
Obviously nobody has a crystal ball that can predict where the housing market is going to end up by the end of 2015. However, if you’re out shopping for a home this year and worried about decreasing value, it may be wise to wait until 2016 to see the states of interest rates. But if you do buy make sure you 1) Get the lowest fixed rate possible for a five-year term and 2) Pay your mortgage as if was two points higher than what you negotiated. This means your loan is paid off faster and you fork out less in interest payment. It also prepares you to handle a more expensive loan at renewal. If you plan to buy and live in that same home for more than 15 years then look for the best home you can afford right now, because in the long term your real estate investment will give you a good return, historically that has been the case.
Happy home buying in the New Year!