Home price growth due for cold shower: Royal LePage

Most markets in Canada will experience continued home price growth this year, following a strong 2015, but a cold shower awaits – particularly for the ultra hot Toronto and Vancouver.

According to the Royal LePage House Price Survey and Market Survey Forecast, the national real estate market is expected to slow later this year, principally due to the effects of a dampened economy in western Canada and eroding affordability in Toronto and Vancouver.

According to the Royal LePage National House Price Composite, compiled from property value data in 53 markets, the price of a home in Canada increased 6.5 per cent year-over-year to $500,688 in the fourth quarter of 2015. The price of a two-storey home rose 7.7 per cent year-over-year to $610,134, and the price of a bungalow increased 5.4 per cent to $420,082. The price of a condominium increased 3.1 per cent to $341,448.

Looking ahead to 2016, Royal LePage forecasts that the aggregate price of a home in Canada will increase 4.1 per cent for the full year, compared to 2015.

SINGLE-DIGIT PRICE GROWTH

"The frenetic pace of our country's largest housing markets should moderate throughout the year ahead," says Phil Soper, president and chief executive officer, Royal LePage. "While most of the country will continue to see house value appreciation in 2016, we expect that the pace of price increases in Greater Vancouver and the Greater Toronto Area – where real estate appreciation has significantly outpaced job and wage growth – will settle to a more sustainable, single-digit price increase trajectory.

"Through the recent period of depressed oil prices, property prices in Canada's energy-centric regions, particularly Alberta and Newfoundland and Labrador, were more resilient than most onlookers had expected," Soper adds. "Consumers, reluctant to sell their homes at what they perceived to be a discount to their true value, simply withdrew from the market, resulting in steady house prices and a drop in unit sales volume.”

Royal LePage expects Canadian home price growth to be more heavily influenced by macroeconomic factors than by housing-specific variables such as tighter regulation in the mortgage industry. The Bank of Canada is expected to keep its overnight rate steady through the all-important spring market, extending the prolonged period of exceptionally low borrowing rates.

The realty firm expects the new mortgage rules taking effect Feb. 15, which will raise the minimum down payment required for the portion of mortgage insurance over $500,000 to 10 per cent, to have a marginal effect on the overall market. The change will produce an added benefit akin to a slight tap on the brake for our two most costly cities – Toronto and Vancouver, Soper says.

“Previous attempts to cool overheated markets by the federal government have been addressed with what I've called a 'blunt instrument of uniform nation impact,'” he told YPNextHome. “This measure will be most effective in the two most expensive cities in Canada, which happen to be the cities that could use a cold shower.”

On a nationwide basis, Royal LePage expects the number of transactions that this will affect to be minimal – significantly less than the initial industry reaction would lead consumers to believe.

FIRST-TIMER CHALLENGES

Vancouver and Toronto are expected to lead in price growth this year, which is great for those who already own a home, but presents a challenge for would-be homebuyers, particularly first-time buyers.

“Although both Toronto and Vancouver have experienced home price appreciation that has been much higher than the rate of inflation in recent years, Toronto remains a relatively more affordable city,” Soper says.

For example, the latest Royal LePage House Price Composite shows the rate of property inflation was 50 per cent higher in Vancouver, at 12.4 per cent year-over-year, than in Toronto, at 8.6 per cent.

“Both cities offer affordability solutions for first time homebuyers, and as always that means farther or smaller. Vancouver introduced the concept of the 'micro-condo' to Canada; homes as small as 300 square feet in size. And even in the Lower Mainland, these tiny condos can be acquired for $100,000. That trend is spreading to Toronto, meaning a young homebuyer could buy very small in the core.

“In both Vancouver and Toronto, the willingness to accept a considerably longer commute from the suburbs means more bang for the buck. That has not changed in recent years, but the drop in the cost of fuel has brought some relief to those with long drives to and from work.”

Photo: Diane Duflot

RELATED READING

Preparing for the new down payment requirement

GTA housing market a global leader

5 hottest markets where you can buy for less than $500K