Canadian Housing Update 12: Listings Increase, we are Unlikely to See Runaway Prices
How will the new mortgage rules affect the housing market
The 2024 Canadian Federal Budget did give some relief for First-Time Home Buyers and some Real Estate Developer tax incentives but was it enough? Another change that could be having an effect is that investors are looking to sell properties ahead of capital gains tax changes in June as supply has surged in most areas by 20-30%!
Once again, the Central Toronto Housing Market is blowing past expectations to start the year as the median home price is just 2% off its 2022 all-time high and this time central Vancouver has joined the party. But these are the exceptions as increased supply continues to hold prices back everywhere else.
Key Numbers
Toronto Central Prices Up 7-8%
Active GTA Listings Up 20%
Toronto Suburb Prices Flat
Vancouver Central Prices Up 5-6%
Active GVA Listings Up 30%
Vancouver Suburb Prices Down 2-5%
Topics
Downtown Toronto and Vancouver are all the Rage
Supply is Hurting Prices
Federal Budget’s Changes and the Effect on Real Estate
Downtown Toronto and Vancouver are all the Rage
Housing prices spiked in the major urban centres of Toronto and Vancouver. Even though supply jumped in these areas by about 15%, the prices were not held back. This is mainly concentrated in the “starter” homes, with 2-3 bedroom townhomes and detached homes seeing the largest price increases. The overall supply of these homes in the urban centres is very constricted and the population growth is extremely rapid. The share of immigrants moving into Toronto is about 48%. Ontario has added about 500,000 immigrants over the past year therefore if 48% are going to Toronto, that would assume 240,000 have settled there. Despite what many people may think, a large portion of immigrants are well-educated with savings and with limited jobs available these immigrants and existing residents have been crowding into the job centres (Toronto and Vancouver). There are not many “starter” homes available in Toronto or Vancouver and a decreasing amount of job openings across Canada. This environment has created a strong demand for being closer to the centre of these cities.
The relative prices of Toronto/Vancouver are growing rapidly vs. the price of surrounding areas and are unlikely to continue at this pace, at some point people will see the value in living further away and paying less. There were areas of Toronto that saw lagging prices vs. surrounding areas but with the recent price increases that is no longer the case. We would expect this price increase in Toronto and Vancouver to moderate given we are very close to all-time highs and the difference in prices in cities just outside the urban centres.
Supply is Hurting Prices
Supply is starting to influence areas outside of urban centres. Most areas have seen flat prices in April with an increase in supply of about 10-30%. Seasonally, this is above previous levels and significantly higher than in 2023. The listing supply levels are consistent with a flat or decreasing price environment of the last 10 years. As an example, it is extremely rare to have an increase in median house prices in the GTA when listings get close to 20,000 and the GTA is currently around 18,000.
This might be difficult to see with the two charts but when the bottom chart’s active listings (orange bars) cross over 15,000 and approaches 20,000, the price increases (blue line) in the top chart usually remain flat or decrease. Historically, the price has never increased when active listings crossed 20,000. There is some good absorption right now with “Days-on-Market” around 20, but an increase there, in combination with high listings would be pointing to “Slow Growth” and when days-on-market exceed 30 days and there are high listings, prices usually decline.
Federal Budget’s Changes and the Effect on Real Estate
The 2024 Federal Budget outlined a few changes to the real estate picture and some of these will have an immediate effect on current prices and affordability.
Change: Increased Capital Gains Tax
The change in increased capital gains will influence investment properties and the decision to sell them. We have seen a supply surge, but this is partially seasonal and partially the capital gains tax. The reality is listing a property and getting it sold before the June deadline is a tight one. Unless an investor was already looking to list their property it is unlikely they would rush to the market. Also, the increased capital gains are in the amount of over $250,000 therefore it would only be on investment properties that have that gain built in. This is not likely a large contributor to the housing supply. On the other hand, a big portion of an investment property is speculative, and selling that property for a gain in the future. This does shift the focus from the price increase to the income on the property. This will also be impacted by the Alternative Minimum Tax that is coming soon.
Overall Effect: These changes should reduce investment property demand in Canada. Which should lead to less upward pricing pressure.
Change: Increased Home Buyer’s Withdrawal from RRSP
Another change was the increase of the potential First Time Home Buyer’s Plan from an RRSP from $35,000 to $60,000. This will give First Time Home Buyers the ability to put forward a larger down payment. The issue with this is that this is a LOAN and does NOT show up on your credit report. Therefore, does not get factored into whether you can afford it in the eyes of the bank. While this is interest-free, you do need to pay it back. If you do not the penalties are large in the form of your marginal tax rate. While the interest rate is 0% the penalties of not paying this back can be 30-40%. This is often overlooked because this is a future problem. While you increase your purchase power, you decrease your ability to afford this property. This is bolded because this is important and very often overlooked. You have a 5-year grace period. The re-payment on a $60,000 HBP LOAN that needs to be paid back over 15 years is $333 Monthly if you wait 5 years, if you start right away this amount is $250 monthly. This amount exceeds the savings of putting an extra $25,000 on a property, which will only decrease your mortgage payment by about $145. You will be $100-$200 poorer each month after this.
Overall Effect: This INCREASES Purchase Price but DECREASES Affordability. This should lift the purchase prices but make the First Time Home Buyers poorer.
Change: Amortization increased to 30 years
This is a nice change and mortgage companies were already headed in this direction. If you put down 20% this was already an option, but now you can have a 30-year mortgage if you put less than 20%. This is needed for First Time Home Buyers due to the challenge of coming up with a large down payment.
Overall Effect: This should support INCREASE prices for entry-level properties and BETTER affordability.
Change: Construction Incentives
The Federal budget did target housing development. This was mainly targeted in two areas: Permitting around “Cookie-Cutter” projects and Development Companies Write-Offs. Permitting is a long process, and they are hoping to accelerate this process by decreasing permit requirements for similar projects. This works for modular home construction and the approach of building the same or similar projects in multiple locations. The write-off incentives will allow development companies to expense costs sooner which will create more after-tax cash flow sooner in a project cycle. This should allow for faster timelines with a lower requirement of upfront capital.
Over Effect: This will create a streamlined process for “cookie-cutter” modular homes. This focuses on the “starter” home. This should reduce the timelines of these projects, mostly for the large home builders. Theoretically, this should increase supply, but the impact will likely be minimal this does significantly reduce the cost of building a home or incentivize building.
Change: Infrastructure Spending
Lastly, they outlined a large portion of the construction of infrastructure. Infrastructure is always a large cost year to year, but this program focuses on 4 areas: Public Transportation, Green Infrastructure, Community and Cultural Recreation, and Rural Communities. You can see projects that fall under this program here. It’s a lot of green buses.
Overall Effect: There is a large spend on protection from flooding, which is very needed in BC. Also, it appears to be a big push towards extending the busing system and making it “green”. This should have minimal effect on housing prices, this is less about new routes and more about expanding existing routes. Great for accessibility especially in low-income areas, but without major changes this will not meaningfully shift our population to less inhabited areas outside our cities.
Canadian Federal Budget Overview
This should reduce investor demand and help First Time Home Buyers get into the market. The accumulation of the changes, Alternative Minimum Tax, and 4.5x mortgage approvals will likely reduce the upward volatility on home prices. There is little they can do to impact affordability, therefore is no impactful change there. The infrastructure spending will take place over time but is unlikely to create any impact on pricing or affordability. Overall, this may lower the demand from investors and make it easier for first timers to get in. But does little to spur Housing Supply which is the larger problem with an expanding population.
Summary
The Federal Budget will help first timers enter the market and should reduce profits in investment properties, which may deter investor demand. Active listings continue to increase and the levels are in line with a historical flat price environment. Given everything, we would not expect to see rapid price increases this year outside of isolated markets. The biggest factors are: unaffordability remains high, active listings are high, and unemployment is moving in the wrong direction. Interest rates may help but small decreases have not historically made a difference in housing prices.
Justin, Konrad, and Merriel
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Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research
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