The current state of the Ottawa housing bubble

by Corben Grant on 18 Oct 2021

After months of uncertainty (and not only in the housing market) many in Canada are hoping for a return to normal.

One major concern for Canadians has been the topic of affordability, as evidenced by the topic's prevalence in campaign platforms of every major party in this past federal election. Statistics for 2021 so far indicate that while 2020 was an anomaly of sorts, the market and the economy are on it's way back on track.

While trends indicate economic growth, for many Canadians the future feels far from certain. In the city of Ottawa, one of Canada's largest real estate markets, many are hoping for a more favourable housing market while others are fearing a housing crash.

Average sale price on the rise

The average sale price for homes and condo properties in Ottawa has been exploding over the last two years, driven by high demand and limited inventory. According to reports from the Ottawa Real Estate Board (OREB), the average home price in Ottawa in September 2019 was around $486,828. Two years later average prices for property have ballooned to $702,155 – a 44% increase.

In the last year alone, home prices in Ottawa have seen a 26% increase. Based on the current average income in Ottawa, over half of its residents cannot afford the average home without outside help. The story is much the same in cities across Canada such as Toronto that have experienced nearly the same increase. If this trend in housing prices continues, everyone but the highest earners in the country is going to be out of luck.

The past year has been highly interesting for analysts as they adjusted to a new paradigm of real estate sales ebb and flow. The traditional seasonal real estate cycle season was interrupted in 2020, though a return to form seems in the cards.

Month-to-month increases in average price have slowed since a year earlier indicating a move away from the rapid growth seen last year. It is hoped this significant price will level off, or even decrease. However, a levelling off from a year ago still represents an increase over pre-pandemic years.

Supply just can't keep up

At the same time, issues of availability are complicating the ability of the market to balance itself. Recent interruptions to the supply chain are one current issue. Builders are struggling to source building supplies for reasonable prices if they can even find them at all. That means the price of a new home, where they actually exist, is higher than ever.

Ottawa Real Estate Board cites supply as a major concern

"Price escalations that we saw in the first quarter of 2021 and now recurring in September are inevitable given the supply challenges we have been experiencing for several years now combined with the unrelenting high demand,” says Ottawa Real Estate Board President Debra Wright. "While inventory has improved slightly from the pre-pandemic years (2017-2019), it is still the principal cause for concern..."

In Ottawa, there is currently about one month's worth of housing stock. There were around 1607 homes and condominiums sold in Ottawa in September, below the five-year average for sales in that month, and far below September of last year.

Seller’s market complicates things for buyers

The imbalance between available homes and interested buyers has led to a seller's market with competitive bidding wars, causing many properties to sell above asking. For those actually able to find available properties, steep competition and blind bidding mean either ponying up big bucks or missing out.

However, OREB indicates trends levelling out in the coming months means this may not be the case moving forward.

"Properties are not moving as quickly as they were. Inventory has picked up; there is less scarcity and more choices – consequently, less upward pressure on prices. Additionally, we are noticing fewer of the multiple offer frenzy situations." said Wright.

Should we be worried?

Many are worried that the increase in price for residential property seems too high to be sustainable. The thinking is that with growth in prices exceeding what most can afford, there is a risk of a market crash.

This could be particularly painful for those getting in now while prices are high, who could risk losing much of their value soon after buying. Even though prices are high now, it is more a product of low inventory and competition among buyers than it is unfounded speculation. Real estate historically is able to hold value well, considering it is a physical asset.

CMHC warns of housing market vulnerability

The Canada Mortgage and Housing Corporation monthly housing market assessment ranks the health of national real estate markets on various criteria. In the September 2021 report, the CMHC ranks Ottawa with a moderate degree of imbalance in all four categories: overheating, price acceleration, overvaluation, and excess inventories.

Overall, the CMHC has ranked the Ottawa market as being highly vulnerable for a downturn, an increase from a moderate ranking a year ago.

What remains to be seen if a downturn does arrive, is just how bad it could be for the market.

Causes for uncertainty

There is one major cause for the uncertainty that should be no surprise by now and that is the COVID-19 pandemic.

Moving on from the pandemic won't mean that all-out real estate problems will be solved, however. Things were still hard pre-pandemic, but getting beyond that major source of uncertainty will certainly be a help.

Smaller uncertainties remain linked to the larger issue of the pandemic. One such question is the return to workplaces and educational facilities. This could shift some demand back towards the rental or condo markets. There is also the question of interest rates, which are low now but likely to rise soon.

Another uncertainty is a government action, which is usually directed at cooling down the market.

How will the government address the issue?

Affordable housing was a major platform issue in the most recent federal election, and many across the country are looking to the government of Canada to help solve the problems of housing. Most recently, the mortgage stress test was made more stringent, with hopes to stabilize the market from major shocks, as well as to cool off some of the demand pushing prices up.

The Liberal federal government has proposed a new housing plan seeking to address current issues. They propose multiple solutions including making homeownership easier for first-time homebuyers, speeding up home development, ending blind bidding, and cracking down on speculation.

As with any political promises, the actual effectiveness of these policies remains in question.

Is it a good time to buy or sell?

Prices should continue to rise, at least gradually for the coming months. Beyond that, there is some uncertainty in how the housing market will behave next year. If you do choose to buy now, you will at least benefit from low mortgage rates. Do your best to pay as close to the market price as possible.

For those looking to sell, the temporary pressure caused by the pandemic may present a better opportunity now than when things cool off in the coming years. That being said, if you're looking to sell your home and settle elsewhere, you will be facing the same competitive market as anyone else.

Overall, though a cooling off and possible price adjustment may be on the horizon, you can sleep at night without fear of a major housing collapse.



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