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Canada’s housing market continues to feel the impact of aggressive rate hikes by the Bank of Canada. Beata Caranci, Chief Economist at TD, tells Kim Parlee why she believes declines in sales and prices could bottom out this year and may start to recover in 2024.
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[AUDIO LOGO]
So 2023, we think we're probably near the bottom. Highly conditional, however, that, one, the Bank of Canada doesn't continue to hike past our expectations. We think at most there's only another quarter-point hike in our future.
And two, we don't see a lot of forced sales. These are people who get themselves into financial trouble in financing their homes because of the variable interest rate mortgage [INAUDIBLE]..
Why don't you see more forced sales? Because that's important.
Yeah, it is important. One of the factors that comes through is that the incentive is to work out on the mortgage, meaning the initial response, even in variable interest rate mortgages, is more goes to the principal-- I mean, sorry, more goes to the interest payment over the principal, and try to maintain a more stable payment structure.
And the same happens when you have to renew if you've had a renewal coming up after five years, is you have equity that you've built into the mortgage. And so, therefore, you can kind of extend out your amortization period or switch out the share of principal to interest.
So these are the behaviors. And this is exactly what we saw in prior recession cycles. People are very practical in how they approach it. And of course, financial institutions would rather not be stuck with the house. [LAUGHS]
Yeah, they want people to have the house and them to have the mortgage, yes.
Exactly. And so there's a lot of incentives on both sides to do workouts. And so this is typically what you see as the initial response. And the other factor is that we're still seeing a very good job market, still seeing very good income growth. And so the financial capabilities are still there for households to continue to pay.
There will be those on the margin who are not going to be in that position. That's just a reality of any cycle. And so those are the ones we have to pay attention to, and those are the ones that tend to reveal themselves with every passing quarter.
You do have, if we take a look at some of the-- because there's no such thing as a national real estate market. We have it right across the board. But you have, as I look across, the-- sales going down in your forecast for 2023. Prices also going down, really, for the first time on average as compared to 2022.
Why are we seeing more resiliency? And I'll just pick up-- we're seeing, for example, that Manitoba is going to go down by 8%, and Saskatchewan down 7%. Nova Scotia is going to go down by 12% and 11% respectively in New Brunswick. Why are we seeing those differences in terms of that?
Yeah, that more relates to the timing of what happened in 2022. And so we had very price-sensitive markets, like Ontario and BC, have not so great a year in the second half of 2022 as they built into 2023. And then we had a bit more of a delay dynamics happening in more affordable markets.
And, interestingly, even Alberta having more resilience than we were thinking because they're on a little bit of a different cycle in terms of even what's happening with their job market. So that's why you're getting, when you look at the provinces, is variability in terms of triggers and timing. Overall, the message is the same. And nobody can escape the fact that high interest rates pull demand away from the market, and all markets are down on sales and prices. But certainly there's nuances in timing.
What about-- there's so many people who ask about foreign real estate. When there's dollars coming in from outside of Canada to buy housing, the idea is that should help housing prices move up if you're not allowed to do that for two years. Is that going to have an impact?
No, not as much as I think when the policy was originally thought through and designed. Because what we've seen, at least during the pandemic, is domestic investors were more the flash point on home prices, speculative-type purchases, than we were seeing foreign buyers. And largely that's because a number of provinces-- British Columbia is a good example-- had already put in restrictions on foreign buyers.
So to me, this is not going to be a big mover in the market. It's really going to come off of the domestic side of the market.
Do you think-- and again, quoting your report, you have here steep annual average price declines are expected to take place in Atlantic, Ontario, and BC in 2023. Are Canadians ready for that? We've just enjoyed this lovely price appreciation over decades. Is there a knock-on psychological effect that we have to be aware of around this?
Yeah, well I think Canadians have had about six months to get used to that psychological effect because we've been seeing it happening in the market already. And I think it's important to remember that we had such a massive run-up during the pandemic. Really, really unprecedented in terms of home values going up. 50% in a two-year span.
Our forecast, we have 20%, 25% pullback in prices. That still leaves the vast majority in a positive equity position, except if you maybe bought in the last 12 to 18 months. That's the vulnerable group.
But ultimately, I think psychologically we also had to prepare ourselves for the run-up that we had. That just was never sustainable.
Although people never do, I'm sure. I was going to say, and then interesting thing is you for 2024 is you have the prices, again, moving back up again.
Yeah, so we do have stabilization coming into the housing market. And part of it's already coming through in the data. We're not seeing as rapid a decline in sales and pressure on listing that we were seeing initially in the cycle. And so that's positive, and we think there's stabilization dynamics that would come through around that first half of this year.
And that allows for some modest recovery second half of this year and into 2024. And we also do have the Bank of Canada cutting rates at the end of this year. And so there's a compounded effect of assumptions that have to unfold, but that should help.
We also know that, in Canada, we have very strong population fundamentals. It would be unusual to just have a housing market go sideways. This is part of the Bank of Canada's challenge because you just continually-- you basically have a population growth that's stronger than anything we see in any peer country. And it basically puts a backstop on the market, and in terms of the psychology of housing for people who know that, hey, there's always going to be this strong demand flowing through. And so that's the tension that we constantly see between interest rates and the housing market
Beata, always great to have you with us. Thank you so much.
My pleasure. [AUDIO LOGO]
[MUSIC PLAYING]
So 2023, we think we're probably near the bottom. Highly conditional, however, that, one, the Bank of Canada doesn't continue to hike past our expectations. We think at most there's only another quarter-point hike in our future.
And two, we don't see a lot of forced sales. These are people who get themselves into financial trouble in financing their homes because of the variable interest rate mortgage [INAUDIBLE]..
Why don't you see more forced sales? Because that's important.
Yeah, it is important. One of the factors that comes through is that the incentive is to work out on the mortgage, meaning the initial response, even in variable interest rate mortgages, is more goes to the principal-- I mean, sorry, more goes to the interest payment over the principal, and try to maintain a more stable payment structure.
And the same happens when you have to renew if you've had a renewal coming up after five years, is you have equity that you've built into the mortgage. And so, therefore, you can kind of extend out your amortization period or switch out the share of principal to interest.
So these are the behaviors. And this is exactly what we saw in prior recession cycles. People are very practical in how they approach it. And of course, financial institutions would rather not be stuck with the house. [LAUGHS]
Yeah, they want people to have the house and them to have the mortgage, yes.
Exactly. And so there's a lot of incentives on both sides to do workouts. And so this is typically what you see as the initial response. And the other factor is that we're still seeing a very good job market, still seeing very good income growth. And so the financial capabilities are still there for households to continue to pay.
There will be those on the margin who are not going to be in that position. That's just a reality of any cycle. And so those are the ones we have to pay attention to, and those are the ones that tend to reveal themselves with every passing quarter.
You do have, if we take a look at some of the-- because there's no such thing as a national real estate market. We have it right across the board. But you have, as I look across, the-- sales going down in your forecast for 2023. Prices also going down, really, for the first time on average as compared to 2022.
Why are we seeing more resiliency? And I'll just pick up-- we're seeing, for example, that Manitoba is going to go down by 8%, and Saskatchewan down 7%. Nova Scotia is going to go down by 12% and 11% respectively in New Brunswick. Why are we seeing those differences in terms of that?
Yeah, that more relates to the timing of what happened in 2022. And so we had very price-sensitive markets, like Ontario and BC, have not so great a year in the second half of 2022 as they built into 2023. And then we had a bit more of a delay dynamics happening in more affordable markets.
And, interestingly, even Alberta having more resilience than we were thinking because they're on a little bit of a different cycle in terms of even what's happening with their job market. So that's why you're getting, when you look at the provinces, is variability in terms of triggers and timing. Overall, the message is the same. And nobody can escape the fact that high interest rates pull demand away from the market, and all markets are down on sales and prices. But certainly there's nuances in timing.
What about-- there's so many people who ask about foreign real estate. When there's dollars coming in from outside of Canada to buy housing, the idea is that should help housing prices move up if you're not allowed to do that for two years. Is that going to have an impact?
No, not as much as I think when the policy was originally thought through and designed. Because what we've seen, at least during the pandemic, is domestic investors were more the flash point on home prices, speculative-type purchases, than we were seeing foreign buyers. And largely that's because a number of provinces-- British Columbia is a good example-- had already put in restrictions on foreign buyers.
So to me, this is not going to be a big mover in the market. It's really going to come off of the domestic side of the market.
Do you think-- and again, quoting your report, you have here steep annual average price declines are expected to take place in Atlantic, Ontario, and BC in 2023. Are Canadians ready for that? We've just enjoyed this lovely price appreciation over decades. Is there a knock-on psychological effect that we have to be aware of around this?
Yeah, well I think Canadians have had about six months to get used to that psychological effect because we've been seeing it happening in the market already. And I think it's important to remember that we had such a massive run-up during the pandemic. Really, really unprecedented in terms of home values going up. 50% in a two-year span.
Our forecast, we have 20%, 25% pullback in prices. That still leaves the vast majority in a positive equity position, except if you maybe bought in the last 12 to 18 months. That's the vulnerable group.
But ultimately, I think psychologically we also had to prepare ourselves for the run-up that we had. That just was never sustainable.
Although people never do, I'm sure. I was going to say, and then interesting thing is you for 2024 is you have the prices, again, moving back up again.
Yeah, so we do have stabilization coming into the housing market. And part of it's already coming through in the data. We're not seeing as rapid a decline in sales and pressure on listing that we were seeing initially in the cycle. And so that's positive, and we think there's stabilization dynamics that would come through around that first half of this year.
And that allows for some modest recovery second half of this year and into 2024. And we also do have the Bank of Canada cutting rates at the end of this year. And so there's a compounded effect of assumptions that have to unfold, but that should help.
We also know that, in Canada, we have very strong population fundamentals. It would be unusual to just have a housing market go sideways. This is part of the Bank of Canada's challenge because you just continually-- you basically have a population growth that's stronger than anything we see in any peer country. And it basically puts a backstop on the market, and in terms of the psychology of housing for people who know that, hey, there's always going to be this strong demand flowing through. And so that's the tension that we constantly see between interest rates and the housing market
Beata, always great to have you with us. Thank you so much.
My pleasure. [AUDIO LOGO]
[MUSIC PLAYING]
