Supply and Demand in The Canadian Real Estate Market – A Crisis?

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Over the last two years, the Canadian real estate market set records. But what is the prognosis for 2017? Will housing prices continue to grow? Or will the housing market bubble finally burst? With new regulations being passed, and an ongoing shift in nationwide demographics, 2017 is shaping up to be an interesting year for both sellers and buyers in the real estate market.

Restricted Supply, Increasing Demand
“It’s not very complicated: there’s a supply curve, there’s a demand curve. If you restrict the supply curve, then don’t be surprised by high prices.” – David Dodge, BoC Governor

As you likely know, supply and demand is the backbone of all commercial endeavor. Low supply and high demand causes prices to increase, while the reverse means a decline in prices. Over the past couple years, demand for housing in Canada has grown at a remarkable rate. Despite nationwide blanket attempts (through government policy) to stymie demand, factors like increasing immigration and population flow into urban centers has caused demand to remain high. As a result, prices and sales both reached record-setting levels.

While demand increased, however, supply could not keep pace. Despite outcries from banks, brokers, and builders for lawmakers to focus on supply rather than demand, many local politicians remained hesitant to foster housing development. For instance, new housing supply plummeted in Toronto and, in Vancouver, supply remained far below long-term historical levels. In addition, the surging prices and overvaluing of homes led to many home-owners opting not to sell. A lot of these homeowners were afraid not only of losing money on their investment, but also that they would be unable to afford another home. Less people willing to sell = less supply.

Effect on the Market
As demand grew at a rate with which supply, for a variety of reasons, could not keep up, policymakers across the nation had to act in order to prevent market instability. Many experts believe that policies, which have been implemented recently, could finally fulfill politicians’ goal of stifling this increasing demand. Despite trends that continued up until the end of last year, it would appear that these latest measures will finally curb the market after the historic sales of both 2015 and 2016.

While the hottest markets, like those in Toronto and Vancouver, are expected to continue to grow, markets throughout the rest of Canada are expected to slow and flatten out. Even among the markets, which are slated for increasing prices, the rate at which they are projected to grow will be less than years previous. If supply is constricted and demand is increasing, why is that the case?

The biggest factor when predicting the real estate market in 2017 is the legislations, which were introduced in 2016. By tightening the regulations on buyers qualifying for mortgage financing, less people are going to be willing or able to enter the market. Additionally, mortgage rates are expected to increase, which is another obstacle for buyers. Furthermore, pressure has increased on lawmakers to re-assign the burden of defaulted loans to the lenders themselves, rather than the insurance providers behind mortgage loan insurance policies. If this takes effect, lenders will be forced to implement even stricter qualifications, even further reducing the incentive to buy homes.

What This Means for Prospective Buyers
If you or your clients are looking to get into the market in 2017, how does all this talk of legislation and supply-and-demand affect you? First off, in plain language, it means that prices are still high. Not only are prices high, but estimated overvaluation in some areas can be as high as 20%. It also means that finding a home, even should you be willing to pay the inflated price, might be difficult as many Canadians are staying put.

Don’t be discouraged yet! Despite all the hurdles to home-owning that have just been outlined, there is a silver lining, as well. As more people are forced out of buying market, demand will decrease, encouraging sellers to establish more competitive rates. The new liberal legislation, from taxes to mortgage qualifications, will likely begin to drive these prices down as 2017 goes forward. For buyers willing to wait until at least the second quarter of 2017, they will see prices begin to fall into a much more reasonable and less-inflated range.

It is also important to note that, while we have been discussing Canada, in general, market outliers like Toronto and Vancouver can dramatically affect the overall picture of the market. That is to say, inflated prices aren’t happening everywhere, certain large cities can just happen to give that impression when looking at the large picture. For buyers with some flexibility, it can also pay to consider the less-impacted areas like British Columbia, Ontario, Saskatchewan, and Nova Scotia.

Even with the recent changes to mortgage rules, you can be the knowledgeable broker who can walk prospective buyers through the experience of buying a home. It is important to be the broker who knows the business and can provide your clients with all the information needed to make this vital life decision, especially during a time of market transition. Most clients are extremely interested in finding out more about buying a home in the current market. Be the professional mortgage broker that your clients need you to be and provide them with information that they don’t even realize is part of your job description.

What This Means For Home Owners
For those already in the housing marketplace, the biggest concern is probably market value. If the shifting landscape of the market causes prices to drop, what will happen to the value of the home you already own?

According to reports, the rising home values of the past couple years created the highest relationship between net worth and disposable income in Canadian history. This is a good thing. Even better, these same reports indicate that many homeowners would not stand to lose everything in the event of a market crash (which many experts are calling unlikely). The DBRS indicates that, even in the event of a crash, the equity of Canadian homes would drop, at worst, to around 60% of their value. This might be less than ideal, but it is far from the catastrophic market crash, which rocked the United States and other countries in recent years.

Bottom Line
The last couple years have been historic in the Canadian real estate market, but all things must come to an end. As a result of new Liberal legislation, most experts believe that 2017 will be the year which ends the rampant growth of the past couple years. Prices and sales are both expected to fall, homes will become less expensive, and, perhaps most importantly, Canada is expected to avoid a major market meltdown. If your clients are looking to buy a home, this might just be the year where homes become affordable again.

Tracy Valko, Mortgage Broker, B.A., AMP
Dominion Lending Centre

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