The Canadian housing market will embark on a “gradual, modest, downward adjustment over the next three years,” according to a new report published by TD Economics.
The special report, titled “Long-Run Rate of Return For Canadian Home Prices,” focused on the annual rate of return Canadian homeowners should expect and the ongoing structural changes that will influence home prices over the long-run.
“Our analysis suggests that the rate of return for Canadian real estate will come at roughly 2% over the next decade,” wrote the authors of the report. “The long-run cruising speed for price growth is projected to be 3.5%. There are several structural changes on the horizon including an ageing populace and population growth increasingly driven by immigration.”
The expected 2 per cent annual rate of return means real estate gains are set to match the pace of inflation. Beyond 2015, the authors noted that the 3.5 per cent annual rate of return should kick in, meaning real estate gains will exceed the pace of inflation, leading to a 1.5 per cent annual gain for homeowners. The pace is less impressive than the 5.4 per cent historic annual rate of increase recorded since 1980.
There are a wide range of macroeconomic factors that will cause the market to experience gains lower than the historic annual rate of increase.
Annual population growth in Canada is forecast to slow from 1 per cent to 0.6 per cent by 2030. Because demand for housing is driven by population growth, the report’s authors expect that real estate price growth will slow down due to the decreasing annual population growth rate.
Interest rates are also expected to rise in the future (not quite yet) with the report’s authors pegging the Bank of Canada’s target overnight rate at a more neutral 3.5 per cent. “If we conduct a similar exercise for an average 5-year fixed mortgage, this would mean that the neutral mortgage rate will be around 7%… As a point of comparison, the average 5-year fixed mortgage rate from 1980-2012 was 9.4%” the report said.
Lower labour force participation and unimpressive productivity gains will dampen Canadian economic growth moving forward. The authors’ forecast that long-run, annual real economic growth will be around 2 per cent by 2021, meaning Canadians can expect roughly 4 per cent income and economic growth. This is about 1.5 point slower than the long-term past. Personal income is important when considering overall housing affordability.
The report also projected the long-run rate of return for notable individual Canadian markets, picking out Vancouver, Victoria, Calgary, Edmonton and Toronto as “out-performer” markets relative to the national average. Regina, Saskatoon, Winnipeg and Ottawa are expected to perform at par while Halifax and Saint John are expected to under-perform.