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Three expert housing price predictions explored

by Corben Grant on 04 Aug 2022

Every investor has, at some point, wished they could accurately predict markets to get the massive returns they all dream of. Some even claim to be able to do so (though we know better than to trust them).

Alas, in the hundreds of years that people have been investing, it has proven futile to predict the future. Though many people make correct predictions, just as many or more make the wrong predictions.

Today especially, investors are eager to see where the real estate market is headed. Following two years of rapid growth, economic forces and policy changes are eroding some of the progress we have seen, and buyers and investors alike are becoming wary.

Though no one can truly say where things are headed, trained economists are perhaps more suited to make educated housing market predictions. After all, it is their job to actively monitor and analyze the market.

Today, we will examine the predictions from three major market analysts to get a broad sense of where things may be headed. Three recently released housing market forecasts, one from TD Economics, one from RE/MAX, and one from the Canada Mortgage and Housing Corporation, each paint a similar but unique picture of our path forward.

Only time will tell who, if any, proves to be correct, but intelligent investors need to be aware of the possibilities so that they can create plans for their overall strategy.

TD Economics Provincial Housing Market Outlook

Released at the end of June, the TD Economics Provincial Housing Market Outlook details the bank's forecasts for the trajectory of home prices and home sales nationally and within each province. The report was compiled by Rishi Sondhi, an economist with a long history working in the real estate field. TD Bank, as one of the largest financial institutions and mortgage lenders in the country, is on the pulse of Canada's economic progress and releases regular reports on the topic.

Canada is in store for a short-term housing decline

The overall forecast from the report is a significant decline in Canadian home prices and sales through 2023. In fact, the bank has "downgraded [their] home sales and price forecasts significantly" compared to just March of this year.

The largest cited factor in this pullback is unsurprisingly monetary policy changes by the Bank of Canada, particularly in interest rates. Already the interest rate has increased by over two full percentage points this year, and TD predicts continued increases up to at least 3.75%.

The increased cost of borrowing will force many Canadians to look for less expensive homes, putting downward pressure on home prices and sales. From Q1 2022 to Q1 2023, TD predicts an overall decline of 33% in Canadian home sales. After this point, they expect sales will stabilize at these new lower levels.

Alongside a drop in home sales, they predict a similar reduction in house prices, up to a 19% decline over the same period, after which point they may begin once again to rise modestly.

Provincial forecasts are not created equal

The national figures can only tell us so much, as it represents an average of multiple very different real estate markets. Looking at the provinces individually, TD predicts some to fare much better while others will see an even greater decline.

In the short term, despite a national predicted home price growth of just 0.4%, nearly all provinces are expected to see year-over-year increasing values in 2022 despite recent month-to-month decreases. The largest growth will be in New Brunswick (19.8%), Nova Scotia (18.2%), Manitoba (13.5%), and PEI (11.1%). Meanwhile, Ontario and British Columbia will see some of the lowest growth at 3.8% and 3.2%, respectively.

Despite high growth potential in some markets, the relative market share of areas like Ontario and BC brings the overall growth average down.

Looking forward to 2023, most provinces are predicted to see a decline in price and sales. Overall, areas with some of the highest price increases over the last two years, such as Ontario, BC, and Nova Scotia, are set to see some of the largest declines in response to affordability woes.

Meanwhile, provinces that have remained relatively more affordable will fare much better in a correction. The biggest winners in TD projection are Manitoba, Saskatchewan, and Newfoundland and Labrador, because it is predicted that they will see modest increases in 2023 up to about 2.3%. Alberta is also expected to decline a modest 1.2% for similar reasons.

The decline must be contextualized against record-high years

Though TD predicts significant decreases in sales and prices across the country into the end of next year, it is worth noting that these prices are measured against previous years' standards. Given the rapid expansion seen in 2021, it is natural that we may not see the same growth in subsequent years, and overall figures will remain above pre-pandemic levels.

It is also worth noting that in terms of market corrections or turnarounds, TD’s two-year time frame for things to turn around again is minor compared to the decade-long downturns that have been seen in the past. Ultimately, it’s not a perfect outcome but far from the worst possibility.

RE/MAX 5-Year Housing Outlook

RE/MAX, as one of the largest real estate brokerages in the country, knows a thing or two about housing markets. In partnership with Benjamin Tal, Chief Deputy Economist at CIBC Capital Markets, they have released a report detailing the 5-year outlook of housing in Canada.

Based on a survey conducted as part of the report, RE/MAX found that of Canadians polled, the largest concerns expressed were taxation (50%), rising interest rates (46%), and an economic recession (42%). Add to this the unfolding Russian invasion of Ukraine, and you have a complete list of what RE/MAX sees as the major factors that will influence our economy and housing for the next five years.

Interest rate effects

On interest rates, Tal notes that “The enemy of the housing market is not high-interest rates [...] It is the pace at which those rates increase that is a big risk to housing."

In one scenario, Tal predicts inflation to begin easing in the fourth quarter of this year, and should it not, he foresees continuing moderate interest rate increases. The effect on the housing market will be more calm conditions, with prices still relatively high due to high demand and a lack of supply. 

Under this scenario of a slow and gradual rate increase, they see little cause for concern in the stability of the Canadian housing market.

In a second scenario, the Bank of Canada could overshoot the ideal pace of rate increases, a situation which Tal notes has caused recessions in the past.

“If we start to see interest rate increases twice per quarter or eight times a year to curb inflation, for example, then we could very likely fall into recession,” says Tal, highlighting the potential for a housing market disruption. “Not only would demand fall significantly, but so too would the capacity of existing homeowners to sustain the borrowing costs of their homes.”

Effects of immigration policy

Another section of the report is concerned with Canadian immigration policy. Immigration plays a huge role in our housing market but presents something of a double-edged sword. On the one hand, new Canadians will need homes like anyone else, increasing housing demand. On the other hand, immigrants may help to fill crucial roles in areas like the skilled trades that help to create more housing supply. However, the report notes that this will require a change to the current immigration policy in place.

Tal sums up the issue: “Currently, Canada’s federal immigration policy does not link with the country’s labour market needs and that will be a mounting problem in our capacity to build enough homes to meet the high demand over the next five years. It’s all fine to table policy to improve our national housing affordability crisis by promising to build more homes and affordable housing — it’s critical — but it’s superfluous when you don’t have the skilled workers to build it.”

Taxation and housing

Finally, the report looks at taxation and its effects on housing over the next five years. The primary concern of tax as it relates to housing is the potential for the government to remove the primary residence exemption for capital gains on home sales. According to the report, while this may cool the market, it would also "truly disrupt" the housing market and "upend the retirement plans of millions.”

They note that to soften the blow, the government should prorate this tax based on how long the home was owned and encourage an influx of supply to the market as homeowners sell to lock in their retirement funds. On the other hand, however, this could also inhibit the transfer of wealth from older to younger generations, which has represented a significant way that young Canadians have been able to afford homes.

Despite the supposed rumours of such a tax, the report cites only one source, an article from Global news that explores a remark from former conservative leader Erin O'Toole. O'Toole, in a debate, claimed that Prime Minister Trudeau wanted to tax primary residences, citing the liberal election platform.

O'Toole was lying, and no such proposal appeared on the platform. Trudeau later decisively claimed: "We will not do that. That is something we are not interested in doing."

While it may be dubious to claim that such a tax is impending, it would be far from the first time the government has said one thing and done another. Therefore, it is not a terrible idea for investors to be aware of the impacts of such a scenario.

CMHC - The Road Ahead

Finally, we have a recent report from the Canada Mortgage and Housing Corporation, Canada's national housing agency and a foremost source of housing data and reporting. Their report, The Road Ahead, attempts to forecast how different policy changes and economic scenarios will affect Canadian housing. The report is compiled in part by CMHC chief economist Bob Dugan.

A tale of two interest rates

The report comprises two hypothetical scenarios that could arise: a moderate interest rate scenario and a high-interest rate scenario. Under the moderate scenario, interest rates would increase to 2.5% (which, since the time of this report, has become a reality) and remain at that level into 2023. This level, CMHC indicates, needs to be sufficient to control inflation but would be "neither stimulating growth in the economy nor causing it to contract."

The second high-interest scenario would see interest rates rise up to 3.5% to intentionally slow the economy and dissipate excess demand. After some time, they imagine the bank returning the rate to the stable 2.5% level.

In both scenarios, mortgage rates for both fixed and variable mortgages would increase – the higher the interest rate, the faster and greater the increase in mortgage rates. At the same time, increased rates also increase construction costs, constraining the housing supply. These factors and the inflated unaffordability seen in the last two years led CMCH to predict a housing downturn by mid-2023.

In the low-interest rate scenario, this downturn could mean a decrease of up to 3% in prices by the middle of next year. In the high scenario, the decline would be closer to 5%. Housing sales will also see a downturn, with expected declines of 34% and 29% in the high and moderate interest rate scenarios.

They predict home prices to begin to climb again in 2024, though note that elevated housing market prices will persist. This, in turn, may significantly affect the rental market, increasing rents and reducing vacancies.

Despite increased construction costs, the report hopes that elevated housing costs will nonetheless motivate continued housing development if at reduced levels from their 2021 peak.

Factors that could worsen the forecast

Finally, the report notes some unpredictable factors that may worsen the outlook. One such factor would be the continuing costs of conflict in Europe. Another may be a subsequent severe outbreak of COVID-19. The report predicts either of these would keep inflation high and necessitate even further tightening of monetary policy. At its worst, they predict this could lead to a period of stagflation.

Overall they conclude that uncertainty may yet persist in the short term, and no clear path forward can be safely concluded just yet.

The overall picture

There are three prevailing trends in these reports: a short-term decline in Canadian housing, an eventual bounce back, and a general sense of uncertainty. 

At this point, economists agree that we must soon pay the price of the unprecedented economic scenarios seen during 2020-2021. However, in their best-case predictions, we are on track to avoid any major disasters, at least in housing. 

Despite the ever-present threat of the Canadian housing market crash, the economists in the know seem not to give the idea much thought. But, a general sense of uncertainty and uneasiness still exists. If the last two years have proven anything, it is that the unexpected is not the same thing as the impossible, and sometimes even the best-intentioned guesses can be wrong. It is important for investors to do these sorts of comparisons and to consult multiple sources to take a general trend of the market sentiment, rather than to take any one analyst's word as gospel.

The bottom line is that the next couple of years may be painful and turbulent, but it seems the light may already be appearing at the end of the tunnel. Investors who take stock now or who focus their sights on long-term goals will have the best chances to come out strong on the other side.



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