Real Estate Outlook for 2017

Real Estate Outlook for 2017
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The 2017 real estate outlook was promising until two major events that took place in the fall clouded that sunny forecast.

Indeed, only a few months ago there was a sense of optimism in the air. In July 2016, Royal LePage even made an announcement stating that the Canadian residential housing market was experiencing “its strongest growth in five years.”

President and Chief Executive Officer Phil Soper praised the “resilience” of the Alberta and Saskatchewan markets, which were then disturbed by the oil crisis. He highlighted the performance of the Quebec market that “continues its recovery”, especially in Montreal with its “healthy increase in prices.”

Then two events overshadowed this favorable situation: Donald Trump’s stunning election victory in the USA which raised fears of rising mortgage rates and the new mortgage rules announced by the Federal Minister of Finance, Bill Morneau which will make buying property more of a challenge.

Given this particular context, what does 2017 have in store for us? We talked to a few real estate analysts to find out.


Reduced Forecasts

The most obvious and direct consequence of the federal measures will be restricting home ownership.

“Borrowers with less than 20% for a down payment will now have to undergo a crisis simulator test,” explains Paul Cardinal, Director of Market Analysis at the Quebec Federation of Real Estate Boards (QFREB). “This test demands that individuals qualify for the contractual rate stated by the Bank of Canada rather than the one granted by their financial institution. That’s a big difference because the gap can be 2%.”

It didn’t take long for the reactions to come piling in after Bill Morneau’s announcement. In Quebec, the QFREB decided to revise its calculations: “Initially we predicted an increase in activity for 2017,” explains Paul Cardinal. “Now I have to scale that back, with a decline in transactions.”


Interests Rates That Are A Cause For Concern

Another source of concern for the Canadian market is the changing interest rates. After several years of historically low rates, an increase seems inevitable for 2017.

“This time it’s true,” confirms Paul Cardinal. Some institutions have increased their fixed rates and the new rules haven’t even come into effect yet.”

The American election has served somewhat of a purpose at least: “The bond markets have been rising since Donald Trump’s victory,” explains Paul Cardinal. And because bond rates serve as a benchmark for financial products, it’s natural that this is reflected in the fixed rates.

“Many economists are now forecasting inflation in the United States,” says Dominic St-Pierre, Regional Director at Royal LePage. If the Federal Reserve increases its rates, there is a good chance that Canada will follow suit and that will affect mortgage rates.”

The new federal regulations will likely inflate rates: “One of the new measures will force financial institutions to retain a greater proportion of liquid assets,” says Paul Cardinal. “The decrease in funds in the mortgage market will cause higher interest rates.”

Last but not least, although unlikely to reduce access to property ownership in Canada, the Canada Mortgage and Housing Corporation (CMHC) announced that, as of March 17 2017, it will increase its mortgage insurance premiums. “For the average CMHC-insured homebuyer, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment,” according to the CMHC.


A Healthy Market, Despite Everything

In a recent analysis, the CMHC identified “difficult circumstances” in several locations across the country, with a particular focus on Toronto and Vancouver.

“In these markets, prices are higher than what is consistent with the fundamentals of income growth and demographics,” says Patrick Perrier, Assistant Chief Economist at CMHC.

However, the CMHC is projecting a “soft landing” for those markets in 2017 and 2018. The reason: a slight increase in employment and (once again) a possible rise in interest rates.

In addition, Paul Cardinal reminds us “75% of the Canadian population lives outside these two major centers, in markets where there is no sign of overheating.”

“Price increases remain slightly above inflation, as is the case historically. There is no risk of a real estate bubble. We have a market that is very healthy,” says Dominic St-Pierre, who remains confident for 2017…


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Edited on 24 January 2017

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