The current oil crisis will not have much impact on home prices in Canada, which are not overvalued, and will not therefore be subject to a major housing correction any time soon. Canada is building just the right amount of new housing for the present and future needs of its population, except in Toronto, where not enough single-family homes have been built, and there could be a problem of under-building. Prices, both for new homes and for resales, will continue to rise, though at a slower pace than last year.
These are some of the findings in a new report (The Market Manuscript) from Fortress Real Developments, which looks at some of the big questions pertaining to Canada’s real estate markets, some of them perennial, others more topical.
Chief among the topical concerns is oil. There has been a vague, widespread sense in the country that the drop in oil prices and the cancelling or delaying of billions of dollars worth of investment in the oil patch must eventually take real estate values down too. Fortress polled “top real estate analysts and economists” for their forecasts concerning oil prices and housing resale values in 2015. Only 12 per cent of the experts believe there will be national consequences of the oil price decline. The rest see it mainly as a local problem for Alberta (31 per cent); 38 per cent foresee no impact on resale values in Canada, at least in the near term. If oil prices remain depressed, home prices could drop in 2016.
A survey of Canada’s top real estate analysts and economists asked for their forecast on oil prices’ impact on Canadian resale housing values in 2015. Thirty eight percent of respondents indicated that the decline in oil prices would not influence the value of Canadian homes. Only 31% felt Alberta real estate would be negatively affected, while 12% felt the oil price decline would result in a drop in housing prices nationally.
The Market Manuscript
These analysts predict that national housing prices will continue to rise this year, but less than last year. Estimates range from less than 1 per cent for new homes to 4.1 per cent for new and 4 per cent for resale. In 2014, the average annual price gain for a new low-rise home was 6.8 per cent.
The Fortress report touches on the difficult subject, or national “obsession” as author Ben Myers puts it, of overvaluation and dismisses most of the standard methods of measuring home valuation, including the widely used price-to-rent, price-to-income, price-to-inflation, and debt-to-income ratios. Each of these two-variable valuations has shortcomings and limited ability to predict future price movements, he says. The Royal Bank of Canada favours a price-to-carrying-costs ratio, as such a measure takes into account the realities of the borrower’s income and the size of the monthly mortgage payment. By that standard, and given that mortgage delinquency rates are at historically normal levels, the market is not overvalued.
A poll of real estate analysts on the probability of a major drop in resale home prices over the next five years produced a mostly negative result: almost two-thirds believe such a major correction is very unlikely.
In Toronto, where the housing market performed “extraordinarily well” in 2014, with a “massive” rebound in new home sales, it is the chronic shortage of new homes that is putting pressure on house prices, even as demand remains high. House prices for both new and resale homes are forecast to rise less this year, however, with a top gain of 6.8 per cent for resales and 5.4 per cent for new homes.
Don’t expect any big changes in 2015 in the Toronto condo market. Last year, the number of resale listings was down, while resale prices rose about 4 per cent. This year, there will be fewer condo completions, hence lower sales numbers. There will likely be more purpose-built rental housing built in Toronto this year, the report says.
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