Canada’s home prices to rise 12% by the end of 2022, economists predict

Canada’s housing market has been defying gravity lately, and there has been no shortage of warnings of a reckoning to come.

But while some see double-digit declines ahead, Capital Economics believes that despite areas of weakness, home prices will rise 12% by the end of 2022.

Home sales and prices saw record gains during the summer, but not all types of housing are seeing the same demand, said Capital economist Stephen Brown.

Though the Canada Real Estate Association does not break down its data into housing type, Capital has learned from local real estate data that house sales are exceeding apartment sales.



chart, line chart:  Not all types of housing are seeing the same demand.


© Capital Economics
Not all types of housing are seeing the same demand.

In the Greater Toronto area, for example, house sales were up 50% in August from the year before, while apartment sales were 11% higher.

Year to date, house sales were 1% higher, while apartment sales sank 17%. The sales-to-new-listing ratio for houses also suggest a 10% rise in prices, but the ratio for apartments signals a 5% decline.

There are a few reasons for this. Working from home has driven a demand for bigger living spaces, a rise in unemployment among lower-income groups caused by the pandemic has hit the apartment rental market and lower immigration has also cut apartment demand. This is especially true in Toronto and Vancouver.



chart, waterfall chart:  Capital has learned from local real estate data that house sales are exceeding apartment sales.


© Capital Economics
Capital has learned from local real estate data that house sales are exceeding apartment sales.

But Capital points out that apartments make up only a modest portion of the market. Even in condo-heavy Toronto, apartments in normal times represent just over 25%. Despite this weakness, the national sales-to-new-listing ratio points to strong price gains, said Brown.

There are always the questions of how long will the pandemic last, will work from home become permanent and when will immigration return to normal?. But beyond those unknowns, Capital bases its forecast on three points of market fundamentals.

Capital believes at least some of the shift to home work will stick, which means that the share of income buyers are willing to spend on a dwelling will rise. The price of single-family homes are also likely to keep rising compared with apartments, which is a reverse of a trend seen since 2017.

The second factor is that mortgage rates will remain low for a long time, probably years. According to data from RateSpy.com, the average five-year fixed rate fell to a record low of 1.99% in September, down from 3.04% at the end of 2019 and 3.74% at the end of 2018. Capital says this has raised the price that a median household can afford by 13% from 2019 and 24% from 2018. National home prices during this time have risen just 4% since 2019 and 6% since 2018.

The third point is that outside of Toronto and Vancouver, apartments have remained an attractive investment. A CIBC survey found that 25% of homeowners said that lower interest rates have prompted them to look for an investment property.

“The upshot is that, despite challenges for apartment prices in Toronto and Vancouver, there is still scope for overall home prices to rise sharply, primarily due to much lower borrowing costs. We forecast a 12% gain by the end of 2022, which is well above the consensus forecast that prices will rise by less than 5%,” said Brown.

Source Article