5 Predictions for Canada’s Housing Market in 2018

5 Predictions for Canada’s Housing Market in 2018

Posted on January 18 by Hilliard MacBeth
Share on FacebookShare on TwitterShare on Pinterest

2017 was a watershed for Canadian housing as some suburban Toronto markets experienced markedly lower prices for the first time in more than a decade. Regulators tightened the rules for mortgage and housing finance. Experts say these changes mean that home buyers will have as much as 20 percent less borrowing power starting early in 2018.

Mortgage fraud-related troubles at alternative lender Home Capital of Toronto and the court-ordered receivership of one of Alberta’s oldest and largest home builders could be harbingers of the beginning of the end of the Canadian housing bubble.

Watch for these key developments:

  • Interest rates, including mortgage rates, go up. The Bank of Canada increased interest rates twice in 2017 and markets are expecting at least one more increase in 2018. The U.S. Federal Reserve raised rates three times last year and is committed to increasing rates several times this year, unless there’s a dramatic weakening in the economy. U.S. rates are important to the Canadian housing market since Canadian rates follow U.S. rates. As U.S. rates rise, Canadian rates must follow or the Canadian dollar will plummet. Obviously higher rates would be a serious headwind for housing.
  • Consumers put their spending binge on hold as the housing market corrects. Until 2017 retail sales had been rising steadily, led by autos, and pushed by cheap rates and easy credit. Core retail sales went from $25 billion in 2009 to $34 billion in mid-2017, a growth rate that is unsustainable with only modest wage gains. Higher house prices allowed people to refinance mortgages, increase their lines of credit for renovations and buy second (and even third) homes. People borrowed money to take family holidays, to help adult children get a foothold on the housing market ladder and for a myriad of other “nice-to-have” items. The so-called “wealth effect” works by making people feel good about their financial position as net worth rises.

If for some reason, such as lower home prices, Canadians decided to start paying down their record-high debts instead retail sales would be hit hard, house prices would correct further and there would be a severe recession.

  • Private sector debt growth slows. Any slowdown in credit (household and corporate) from its torrid pace of the last five years will be difficult for economic growth. The private sector debt-GDP ratio increased by 20% over five years to the end of 2016, pushing that ratio to 218%, one of the highest of all developed countries. While this exceptional growth helped to prop up the economy in the short run it cannot continue at this pace for much longer.
  • Wages rise. This is good news for workers after years of stagnant incomes. The increase in the hourly minimum wage in Ontario from $11.60 to $14 will give additional spending power to many people, although it won’t be enough to make housing affordable again. In Alberta the minimum wage increased to $13.60 in October 2017 and will jump to $15 in October 2018.

The unemployment rate in Canada is less than 6 percent, a record low for the past decade. Such a tight labour market usually leads to wage increases and, barring a recession, will result in higher inflation.

  • The Canadian dollar heads lower, to 72 cents or even lower. If the Bank of Canada tries to keep interest rates low enough to mitigate the worst aspects of a weak housing market the dollar could test the 65 cent level. A very weak dollar would push inflation higher which leads the Bank of Canada to raise interest rates. Higher interest rates mean that even fewer people will qualify for mortgage loans, weakening the housing market even further and creating a negative feedback loop.

For those few people who have waited for house bargains, 2018 could be the year if these predictions come true. Patience will be finally be rewarded.

But a word of caution regarding “bargains” — the best deals won’t appear until many people are forced to sell their properties. Lenders usually get the power to sell through foreclosure, so watch what the banks and other lenders do.

2018 will be a very interesting year.