Property heading for a crash? 7 reasons why it's hard to tell: Don Pittis
Will real estate fall off a cliff? As Canadians wait for the latest numbers, the threat of rising interest rates is only one of the considerations affecting house prices.
Latest numbers on Canadian real estate sales and prices come tomorrow
The Canadian condo building boom continues, but that could change abruptly if interest rates shoot up and construction catches up with demand. (Don Pittis/CBC)
Social Sharing
In some ways it would be easier to plan if we really knew for sure whether Canadian home prices were about to fall off a cliff as so many people keep predicting.
But of course that's not how markets work. A difference of opinion about the future is one of the reasons why there is always a buyer for something you are anxious to unload.
Decisions on where the market will go next depend on too many factors to include here.
But as Canadians wait for tomorrow's latest data on house sales and pricing from the the Canadian Real Estate Association, here are some considerations people may use to gauge if or when house prices will tumble.
1. Interest rates
As usual, the biggest threat cited for home prices is how much we pay for the money we borrow.
In previous times a two percent increase from 8 to 10 percent would be painful but incremental. In the current market, a sudden rise in interest rates, say two or three percentage points, would double the cost of interest payments, popping a decade-long bubble blown up by the Bank of Canada's artificially low rates.
Most analysts expect Stephen Poloz, governor of the Bank of Canada, to leave interest rates unchanged next week. But rising rates will gradually make mortgages more expensive, taking heat out of the market. (Denis Balibouse/Reuters)
A more moderate path would give the housing market a chance to adjust. Even if, as expected, our central bank follows the U.S. to higher rates, a lot of uncertainty remains over how fast North American rates will rise.
2. Inflation
The main reason rates could rise suddenly would be that central banks might feel compelled to quell a sudden burst of inflation. So far, inflation has been tame.
Historically, inflation rises and falls in a long cycle and while after the fact economists will tell you why it happened, there are wide differences in opinion over where the cycle is heading next.
Inflation remains low in Canada, with overall prices rising just over two per cent year on year in February. (Karin Larsen/CBC) While inflation could lead to higher rates, some homeowners may see Canadian property as a long-term inflation hedge.
3. Pent-up demand
In many parts of Canada, not just Vancouver and Toronto, following years of rising prices and bidding wars, housing demand remains strong.
Government policy, including a rule that new buyers must be able to handle interest rate increases, may mean a pent-up demand for housing, including by large numbers of new immigrants, will support prices if incomes begin to catch up.
Over the past few years houses like this one in the Toronto suburb of Scarborough have been subject to bidding wars, but this year Toronto detached house prices have cooled compared to condos. (CBC) Even if market conditions begin to change, it may mean house hunters — schooled in a market of ever-rising prices — will take time to adjust to the new reality, leading to a softer landing.
4. Rate of construction
Home building in Canada's hottest markets remains strong. Toronto's skyline is still a sea of cranes, and the ground is full of busy holes.
This week the Canada Mortgage and Housing Corp. revealed that housing starts slowed in March.
Location, location, location. Homes that go up in this construction site near Toronto's downtown core may be more likely to keep their value than those in places with fewer services. (Don Pittis/CBC) The ability of construction companies to keep pace with demand could affect the value of existing homes, with overbuilding leading to falling in prices.
If instead builders overreact to the fear of falling prices and produce too few, that could have the opposite effect.
5. Investment properties
On my short Toronto block, two houses sit empty. In the bank of condos out the window by my desk, many balconies show little sign of life and the lights don't go on at night.
Owning a condo in Vancouver or Toronto over the last decade has been a lucrative investment even without the bother of renting.
While condos sell quickly, some are owned by investors who have been taking advantage of double-digit speculative gains. Falling prices could mean investors will look elsewhere. (Don Pittis/CBC ) According to the CIBC that's changing. As those stunning returns disappear, as author and financial adviser Hilliard MacBeth has said, people may decide to invest their money elsewhere, accelerating a downturn.
6. Economic health
Potential home buyers may be less inclined to go out on a limb if they think the economy is going bad.
Various economic commentators have warned that a pattern where short-term interest rates exceed long-term rates may be a signal that the current long period of economic growth is heading toward recession.
As with inflation, economies go through cycles. A moderate slowdown, however, could reduce the impact of inflation and thus the need to raise interest rates.
That said, strong economic growth creates jobs and increases the wealth of Canadians, making them better able to cover housing costs.
7. Local differences
Partly due to U.S. President Donald Trump's sabre-rattling over Syria, oil prices seem to be on the way up.
An oil recovery could come to the rescue of home prices in oil-producing areas of Canada, languishing since the 2014 oil price slump.
Oil prices have been rising. If that continues, houses in areas such as St. John's could see improving home markets that were shattered when oil fell into the $30 US a barrel range. (Paul Daly/Canadian Press) Interest rates will have an effect on everyone, but whether the price of your house will rise or fall will also depend on where you live or where you want to buy.
Housing prices are regional, and homes in areas that are in demand because the economy is strong or because they are close to services are more likely to hold their value.
Based in Toronto, Don Pittis is a business columnist and senior producer for CBC News. Previously, he was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London.
