Rising interest rates and lower job growth will temper home sales across Canada this year and next, says a recent Scotiabank report.
“Canadian housing activity remains buoyant, though the underlying fundamentals for continued gains are becoming less favourable,” says the bank’s Global Real Estate Trends report.
The average inflation-adjusted home price was up 2.5 per cent in the second quarter of this year (April to June) compared with the same period in 2012. This put Canada in the middle of a 23-country ranking.
“Low borrowing costs and balanced market conditions continue to attract buyers, though slowing job growth and the recent uptick in fixed mortgage rates will likely cool activity later in the year and into 2014. Affordability also is challenged in some of Canada’s largest urban centres, primarily for single-family homes.”
The bank expects this to slow housing construction to about 170,000 units next year — down from 183,000 annualized starts this year.
On the condo market
The Scotiabank report also raises concerns about an oversupply of condos in major cities.
In Toronto, for example, sales of both new low-rise and high-rise homes have fallen sharply over the past year.
“Reduced expected returns have dampened investor demand for new condos, while high prices and supply constraints have undercut low-rise sales,” the report says.
However, condo resales are holding up in Canada’s most populous city, suggesting that demand from owner occupiers remains healthy.
Meanwhile, the bank says potential imbalances are emerging in Vancouver and Montreal’s condo markets.
“Here too builders are slowing the pace of new construction in order to reduce inventories — apartment starts this year are down roughly 30 per cent [in Montreal] and 10 per cent [in Vancouver].”
The bank says that over the medium term, a number of factors will continue to support condo demand, including the high cost of single-family homes; lifestyle considerations such as shorter commutes and lower maintenance; and demographic shifts such as immigration and an aging population
“From a supply perspective, development restrictions and land constraints are expected to continue to promote urban intensification,” the report concludes.