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Low Interest Rates Fundamentals, Immigration & Job Growth will Keep Housing on Stable Footing


Under Market Updates

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January 31st, 2020

The Canadian housing market entered the new year showing “renewed dynamism” after gliding in for a soft landing following a long boom. But according to research firm Oxford Economics, the heat once again emanating from the market isn’t enough to reach full-on housing boom territory.

The firm, which published a research note this month titled, “A housing rebound is underway, but a new boom is unlikely,” acknowledged that the indicators for the Canadian housing market are strong. Sales are climbing again in all major markets while supply is struggling to keep pace, leading to growing momentum on the pricing side and seller’s markets nearly across the board.

But, economists Tony Stillo and Michael Davenport wrote in the note that these positive signs don’t mean the market is roaring back to life.

“Despite strong underlying demographics and continuing low lending rates, housing activity is set to improve only modestly in the near term, limited by elevated household debt, excessively high house prices in key metros, and a more slowly growing economy overall,” they wrote.

Persistently high household debt and what the economists view as “vastly overvalued” homes in the key markets of Toronto and Vancouver are the major “downside risks” they see as threatening to weigh down the market, especially if interest rates begin to rise sharply or the labour market takes a hit.

Stillo and Davenport are particularly concerned about affordability in Toronto and Vancouver and these “overvalued” markets’ potential to upend a stabilizing national housing market.

“Based on households’ borrowing capacity and a 10% down payment, we estimate the price for an average home is about 34% higher than the median-income household can afford in Greater Toronto and a staggering 68% out of reach in Greater Vancouver,” they wrote.

While the federal Liberal government has continued its push to expand the First-Time Home Buyer Incentive program it introduced prior to the fall 2019 election as a way to address affordability challenges in these markets, the Oxford economists aren’t sold on the effectiveness of the plan.

“New measures promised by the federal government to address affordability will likely have opposing effects on home prices. A boost to the qualifying value for the first-time homebuyer program in highly-priced markets would increase demand and add to price pressures,” they wrote.

But as the economists are careful to caution that the risks to the market could push it back into more volatile territory, overall they’re reasonably confident that the fundamentals — high immigration, job growth and low interest rates — will keep housing on stable footing for 2020.

Oxford Economics : Canada’s Housing Market Won’t Boom in 2020 by Sean MacKay | Livabl

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