LDN - Business

Canada housing market bouncing back, but not to boom times

[November 22, 2019] By Mumal Rathore

BENGALURU (Reuters) - Canada's housing market has turned the corner and prices will increase modestly faster over the coming few years, a Reuters poll of economists and property market analysts predicted, but with no return to boom times any time soon.

After an eight-year period of rising house prices that culminated in near double-digit gains in 2017, the market slowed significantly, particularly in urban hotspots Toronto and Vancouver, partly thanks to government efforts to curb property inflation.

But a strong domestic economy, rising immigration and lower mortgage rates have helped the housing market make a comeback in the second half of this year.

The Nov. 4-20 Reuters poll of 18 economists predicted average national house prices to beat the current inflation rate of 1.9% and rise 3.0% next year and 2.9% in 2021, a significant upgrade from 1.8% and 2.0% expected in an August poll.

Those were the most optimistic views since polling began for those periods early this year.

"The pillars strongly supportive of housing demand in Canada have remained intact: remarkable job creation, superior wage growth and a very low interest rates environment," said Sebastien Lavoie, chief economist at Laurentian Bank.

"The low and stable housing starts to labor force increase ratio is one of many metrics indicating no risk of over-building and refuting overblown concerns about the Canadian housing market."

Over 80% of poll respondents who answered an additional question, 14 of 17, said housing market activity was more likely to rebound than slow down over the coming year.

Although home prices fell in October after rising for six months in a row, they are still on an upswing.

In Toronto - one of the most expensive property markets in the world - house prices have already started picking up and were expected to rise 5.0% in 2020 and 4.0% in 2021, compared with 2.0% and 3.0%, respectively, in the previous poll.

House prices in Vancouver, which were expected to decline 6.3% this year, were forecast to rise 2.0% in 2020 and 3.0% in 2021.

But affordability still remains a concern in major cities. When asked to rate house prices on a scale of 1 to 10, respondents rated Toronto and Vancouver at 8.

"Demand-supply conditions have tightened over the past year," said Robert Hogue, senior economist at RBC.

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A real estate for sale sign stands in front of a row of houses in East Gwillimbury, Ontario, Canada, January 30, 2018. Picture taken January 30, 2018. REUTERS/Mark Blinch

"You've got some markets that were previously undergoing a correction that have now turned around, whereas the greater Toronto area - now it's even arguably a seller's market - so there is pressure starting to build on prices already."

Those rebound calls were partly driven by the recent implementation of incentives for first time home buyers by Prime Minister Justin Trudeau and promised income tax cuts since he was re-elected last month.

"It is not just low interest rates that are helping the housing market – the fundamental support is demographic and that is largely from a rapidly growing population driven by international migration," said Sal Guatieri, senior economist at BMO.

A slight majority - 10 of 18 - said an interest rate cut by the Bank of Canada would not do much to stimulate housing market activity and prices.

The BoC is expected to join its major peers like the U.S. Federal Reserve and European Central Bank in cutting its key interest rate next quarter, according to a separate Reuters poll.

Prevailing supply constraints in the market also explain why house prices are forecast to rise in coming years given that underlying demand for housing is relentless. Housing starts fell to a five-month low last month, according to the Canadian Mortgage and Housing Corporation.

"Past declines in pre-construction sales in key markets point to some downside for homebuilding in 2020," said Rishi Sondhi, economist at TD. "That said, 2020 should still be a fairly healthy year for construction thanks to healthy fundamentals, notably robust population growth."

(The story corrects background in second paragraph to show eight years of rising house prices, not seven, and near-double digit gains in 2017 before 2018 slowdown.)

(Additional reporting by Indradip Ghosh; Polling by Manjul Paul; Editing by Ross Finley and Saumyadeb Chakrabarty)

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