How accurate was our 2016 real estate market outlook?

Another year passes and, once again, we can check off another record-breaking year for real estate in Canada. This time, however, the headlines weren’t just about bidding wars and astronomical house prices; this time the headlines also announced new mortgage regulations, extended down payment rules and new taxes. So, just how accurate was our real estate market overview for 2016? Here’s what we expected and here’s what happened:

No. 1: A tale of three markets ✓

We anticipated that the two hot real estate markets in Canada—the Greater Toronto and Vancouver areas—would remain strong, while the rest of Canada would experience only modest prices increases (if any at all). For the most part this was true. According to data from the Canadian Real Estate Association, the Greater Toronto Area continued to rise in price, as did the Victoria, B.C. area. The Greater Vancouver Area, however, started to see price declines, while oil dependent Alberta also started to see some price appreciation (signalling that the real estate market in this province is now past it’s the oil-slump pricing and in balanced market territory).

Here’s a snapshot of the gains and losses from November 2015 to November 2016 for a few of Canada’s largest cities (and compared against the national average):

No. 2: The Bank of Canada will weigh in ×

At the start of 2016, the Bank of Canada maintained its overnight target rate at 0.5%. The concern was our nation’s slow growing economy coupled with anemic global growth. But that didn’t mean the government, or the BoC, weren’t concerned about a housing bubble in Canada. It just meant the BoC wasn’t going to wield the tool to fix the problem.

Instead, a few arm’s length government agencies implemented their own changes, including the increasing premiums on high loan-to-value mortgages—mortgages, where the buyer puts less than 20% down to purchase the house, and raising the minimum down payment on homes valued at $500,000 or more (for more on how these new minimum down payments work, go here), so that anyone purchasing a home after Feb. 15, 2016 would need a larger down payment.  At the time, Alyssa Furtado, CEO of Ratehub.ca, explained that “these regulatory changes are much less severe than an interest rate increase and didn’t cool the hottest markets.” As a result, she believed more changes would come. “I anticipate the government will continue to make little tweaks and if markets don’t cool we will see more changes in the future.”

It happened.

August 2, 2016: B.C.’s foreign buyer tax – Introduced by the B.C. government, this measure requires anyone buying a home in the Greater Vancouver area, who was not a Canadian citizen or permanent resident, to pay an additional 15% tax in addition to all the existing costs associated with a real estate purchase. On a $1.5-million home, this tax equated to an additional $225,000 cost to the foreign buyer.

October 17, 2016: Rate hike stress test – At this point, everyone knew that the Bank of Canada wasn’t going to increase interest rates. Keeping inflation at around the 2% mark was the Bank’s primary goal (as this keeps allows for maximum economic growth without sacrificing jobs). Yet, with such historically-low interest rates the hottest of Canada’s housing markets just kept rising. Then it came to light that there was a way to circumvent the government’s mortgage stress-test and enable would-be buyers to purchase higher-priced homes, as a result. MoneySense wrote about it in June 2016—rightly calling it a mortgage loophole that put all Canadians at risk—but it wasn’t until October that the government stepped in. Concerned that possible higher interest rates could push hundreds of thousands of Canadian households into default territory, Ottawa closed the loophole. Now all homebuyers are required to qualify for the Bank of Canada’s posted five-year rate of 4.64%, even if their actual discounted mortgage rate is half this posted rate.

October 21, 2016: Lender risk sharing (proposed) – For the first time in 60 years, the country’s mortgage lenders may be asked to share the risk of homebuyers defaulting on their mortgage payments. Under the current system, lenders pay insurance premiums for mortgage loan insurance and pass on the cost of this insurance to buyers who put down less than 20% (the lenders will still buy this insurance even if a buyer puts down more than 20%, but don’t pass on the cost). This insurance will then reimburse the lender for any losses should a homebuyer stop paying off their mortgage debt. Now, there is a proposal for lenders to absorb a portion of those losses themselves—the idea is that lenders will be less willing to offer mortgages to riskier borrowers if they are on the hook for a portion of potential losses.

November 16, 2016: Vancouver vacant homes tax – This past year the B.C. government took a great interest in trying to correct what has been perceived as a distorted housing market in the Greater Vancouver area. In the hopes of bringing more supply into the system, the city approved Canada’s first-ever vacant homes tax. Starting in 2018, owners of properties deemed vacant for 12 or more months, will have to pay the equivalent of 1% of the home’s assessed value as a vacancy tax. According to city data, this new tax will impact roughly 11,000 Vancouver homes—90% of these being condos.

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No. 3: Mortgage rates won’t rise ✓

Debates aside, Robert McLister, mortgage planner at intelliMortgage and founder of RateSpy, predicted that mortgage rates would not rise in 2016. They didn’t. As he explained in January 2016: “With the commodity crash decimating Canada’s growth outlook, long-term inflation expectations have plunged,” says McLister. “Since mortgage rates are so tied to inflation, there’s a good chance rates will stay rock bottom in 2016.”

No. 4: Household spending will begin to normalize ×

We all know that the rock-bottom interest rates directly impact Canada’s rising household debt numbers. In the last 2015 Monetary Report, the BoC conceded that their own rate cuts helped fuel the increase in debt spending. However, the BoC was optimistic about 2016, believing that recent regulatory changes and rising real income due to lower oil prices, would result in more moderate spending levels. 

But by September 2016, Canadian consumers were making history and not in a good way. For the first time, the level of debt held by Canadians had exceeded the country’s gross domestic product—up from 98.7% of GDP in the first quarter of 2016, to 100.5% of GDP by the end of the second quarter.

But consumers aren’t just racking up the mortgage debt. According to credit monitoring agency TransUnion, Canadians continued to pile on non-mortgage debt and, for now, delinquency rates remain low. According to data from TransUnion, average consumer non-mortgage debt rose to $21,686 at the end of 2016’s third quarter, up from $21,195 in the same quarter in 2015.

No. 5: Expect more foreign interest in Canada’s real estate ✓

While low interest rates are the driving force behind strong property markets in Toronto and Vancouver, there are other factors. One that dominated media headlines in 2016 was the impact foreign buyers had on Canadian housing prices.

“When you examine housing prices in Toronto and Vancouver and compare it to London, UK, New York, or Singapore, we’re still seen as a more affordable option,” explained Gurinder Sandhu, executive vice president, RE/MAX Integra Ontario-Atlantic Canada region. At the time, Sandhu wasn’t too concerned. He felt that these non-resident buyers were purchasing retirement or vacation homes—places where they could set down roots once they hit retirement. Sandhu argued: “Canada is very attractive because it’s stable politically and economically, it’s got great education and the best places to work.”

But the impact of B.C. foreign buyers’ tax may tell a different tale.

According to data released by the B.C. government on September 22, 2016, billions of dollars in Metro Vancouver real estate deals dried up virtually overnight after the 15% tax on foreign nationals was introduced in early August 2016.

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According to city data, the number of transactions involving foreign buyers plunged from 2,034 deals in the seven-week period before the tax, to 60 transactions in the first four weeks after the tax was introduced. (The tax took effect on Aug. 2, 2016.)

According to the same data, the total value of all residential sales involving foreign nationals was $2.3 billion in the seven weeks before the tax was introduced (June 10 to Aug. 1), or an average of just under $328.6 million per week. The total value of sales over the four-week period after the tax (Aug. 2 to 30) plunged to $46.9 million, or an average of $11.8 million per week.

Put another way, the percentage value of sales involving foreigners fell from 16.5% of all sales to 0.7% in the month after the introduction of the new tax.

So, it’s safe to assume that foreign buyers were put off by real estate in the Lower Mainland. But that doesn’t mean that foreign buyers left Canada. Housing prices in Victoria, B.C. skyrocketed, with a year-over-year increase of close to 22% by the end of November 2016. The Greater Toronto Area, including Hamilton and Burlington, also caught fire posting average housing price increases of 22.8% and 19.7%, respectively. PEI, the only other jurisdiction to implement a type of foreign buyers’ tax remained stable, with no reported year-over-year gains or losses.

No. 6: No housing market crash in 2016 ✓

Still, the most pressing question regarding Canada’s real estate markets is whether or not there will be a price crash. 

On January 18, 2016, CIBC Chief Economist Benjamin Tal discussed these concerns, stating that “The world economy is in unchartered territory, but we have to keep things in perspective.”

He pointed out that lower oil prices and a devalued loonie were absolutely taking a toll on household budgets, but argued that this was just part of much-needed world-wide rebalancing of an economical equation. “Prior to 2016, oil producers were making more money than oil consumers.” As a result, we’re just seeing a transition: A rebalancing between oil producers and consumers. As a result, Tal predicted that 2016 would be a “transition year—from something bad to something better.”

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Correction: A graph taken from BetterDwelling.com, based on CREA statistics, was removed from the story as of January 4, 2017, as the house price depreciation for Vancouver, B.C. was not accurately portrayed. The statistics listed in the table were taken from CREA.ca and are considered accurate, to date.