Rising mortgage rates over the past year and the new stress test for mortgage applicants, which commenced January 1st, 2018, have had a significant slowdown effect on key areas of the Canadian housing market, especially during the first quarter in Vancouver and the GTA. Nationally, year-to-year home sales volume fell in February by 16.9 per cent, and by a startling 35 per cent in Toronto, representing the steepest decline since the recession in 2009. Year-to-year prices also fell in Toronto by 12 per cent in February. This sudden market shift has implications for other important areas of the economy, as many individuals are feeling less wealthy; for example, auto sales are now slowing in Ontario for the first time in several years.
The good news is, as we enter the busy spring real estate season, the rate at which the market has dropped is declining, showing signs of stabilization as sales trends start to flatten out:
Toronto’s housing market continued to show signs of stabilizing in April, but sale prices remain significantly below the record levels hit last spring… April’s average sales price was 0.2 per cent below the average sales price in March this year, based on preliminary seasonally adjusted numbers. TREB said the month-over-month sales trend “has flattened out” over the past two months after the market saw a steeper drop in January and February. – Globe and Mail
Home Buying Preferences Shifting to Condos in GTA
Despite the sudden drop in the GTA housing market, in terms of sales volume, prices and new listings, employment remains strong, as does the appetite for home ownership. However, market conditions this year, with higher mortgage rates and additional financial barriers for expensive homes, have shifted buyer preferences away from pricey detached homes to more affordable condominiums:
Prices continued to stabilize with benchmark prices, which are weighed to account for differences in home type, rising 0.7 per cent from last month. The condo apartment segment helped boost prices, jumping 10 per cent to $495,600 from a year ago. In contrast, detached home prices tumbled 10 per cent to $927,800 from April of last year… New listings fell 25 per cent to 16,273 from 21,571 in April last year. Average home prices in the Toronto region fell 12 per cent to $804,584 compared to last April. – Financial Post
Housing Market Decline Leads to Slowing Auto Sales in Ontario
With the decline of home prices in the economic heart of Ontario, many people in Canada’s largest province are suddenly feeling less wealthy. As equity in their homes diminish, due to falling prices, access to home equity lines of credit is becoming tighter, not to mention more expensive with rising interest rates. This is giving many folks in Ontario pause when considering the purchase of a vehicle, prompting some economists to predict that there will be a slowdown in auto sales in the province:
Ontario’s purchases will “ease off” partly because a softer real estate market in the province will erode use of home equity loans to purchase vehicles, Scotiabank economist Carlos Gomes said in an interview. – BNN Bloomberg
In fact, actual evidence of this ‘easing off’ is starting to materialize. According to DesRosiers Automotive Consultants, Canadian auto sales were down by 0.6 per cent in March compared to the same period last year. Although this is not a huge drop, it does represent the first sales decline in 2018. This pullback highlights a vulnerable are for the Ontario economy, as about 1 in 6 jobs in the province is directly or indirectly related to the automotive sector.
Expectations Remain Optimistic for the Second Half of 2018
Despite the sudden drop in homes sales and volume in some key Canadian housing markets, there is sense among industry experts that these markets will rebound in the second half of 2018:
“The combination of declining affordability and government intervention has for the most part neutralized very high home price appreciation levels in the greater Vancouver and Toronto regions, relative to the extreme heights witnessed in recent periods,” said [Phil Soper, President and CEO of Royal LaPage]. “However, those looking for this slowdown to translate into material year-over-year home price drops shouldn’t hold their breath. The demand for housing is so strong that the rate of home price appreciation is expected to pick up again in the second half of 2018.”– Mortgage Broker News
Pending Risks: NAFTA Negotiations and Rising Interest Rates
With the Bank of Canada continuing to signal that additional interest rate increases are on the horizon, as a matter of when not if, and the lingering uncertainty over the ongoing NAFTA negotiations, especially in relation to the Canadian automotive industry, a quick bounce back for the Canadian housing market is by no means guaranteed.
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