Three key policy areas could stabilize the country’s housing market over the next five years, according to a new report. While property price growth could see less extremes thanks to these policies, prices are still likely to stay high.
RE/MAX Canada has released the first chapter of Unlocking the Future: A 5 Year Outlook, one in a series of reports that collaborate with industry experts on various “what if” policy scenarios that could impact Canada’s housing market.
Over the next five years, Canadians ranked taxation (50 per cent), growing interest rates (46 per cent), and potential economic recession (42 per cent) as their top three worries about buying a home, according to a Leger survey. The first report, which was developed by RE/MAX Canada, CIBC Capital Markets and the Conference Board of Canada, looks at how the country’s housing market might respond to specific scenarios related to immigration, taxation and interest rate increases between 2022 and 2027.
RE/MAX Canada says that the reports try to “help Canadians take a longer-term view of their investments,” by using hypothetical outcomes based on historical learnings in addition to current and future market conditions, but stated that the reports are “not trying to predict the future.”
“To help ease some of the worries and concerns that come with today’s social and economic volatility, we wanted to give Canadians more long-term context and clarity — to be more informed — about their most precious possession and one of their most valued assets,” said Christopher Alexander, president of RE/MAX Canada, in a press release.
Here’s what we know from the first report in the series.
Rising rates may relax hot housing market
In the event that the Bank of Canada makes four interest rate increases in the coming year, this could help to stabilize the county’s housing market.
“The enemy of the housing market is not high interest rates — that is good for the economy in fact. It is the pace at which those rates increase that is a big risk to housing,” said Benjamin Tal, deputy chief economist at CIBC Capital Markets. “Rate increases at a reasonable schedule of four times a year would create a stable and more relaxed housing market over the next five years.”
Tal predicts that inflation will ease by Q4-2022, and if it doesn’t, the BoC will likely raise interest rates at a “consistent quarterly pace to sustain a stable economy with healthy employment and a less heated housing market.”
The report states that under these conditions, the housing market will stay expensive into 2027, but prices will not be as heated compared to the last couple of years. The demand for housing is expected to keep prices high as a result of comparatively lower inventory, but in a higher interest rate environment, the market could be more stable and cooler than what Canadians have seen over the last five years.
“Canada’s housing market is far more stable than many people and industry watchers perceive,” said Tal. “Yes, there are specific caveats, such as prolonged inflationary pressure, that could upset the balance, but should the BoC stay pragmatic and consistent, the next five years look entirely sustainable for Canadians.”
Should the BoC raise rates more than six times annually due to prolonged inflation, this could put the market in recession territory. Each Canadian recession over the last 50 years has been triggered by central banks overshooting the ideal pace of interest rate hikes, according to Tal, which he says is the biggest potential threat to the stability of the housing market over the next five years.
“If we start to see interest rate increases twice per quarter or eight times a year to curb inflation, for example, then we could very likely fall into recession. This would obviously upend the economy, employment and housing,” he said. “Not only would demand fall significantly, but so too would the capacity of existing homeowners to sustain the borrowing costs of their homes.”
Immigration needed to fill labour gaps, build new homes
If Canada follows through on its plans to welcome more than 400,000 immigrants per year — especially those with higher education and work experience — this could benefit the housing market.
Iain Reeve, associate director of immigration research at the Conference Board of Canada, noted in the report that immigration “produces significant benefits” for the Canadian economy and helps to meet labour market needs.
“Canada’s system excels at selecting immigrants who have a high likelihood of long-term economic success,” said Reeve. “However, the system could improve by selecting more immigrants to fit specific, chronic labour market needs. In particular, a focus on immigrants with skills in the trades and construction could help address severe labour shortages that limit housing supply.”
The report states that there is “a missed opportunity,” by not choosing more immigrants who are trained in the trades, an area that is experiencing a labour shortage.
Data from BuildForce Canada says that 90,000 workers will leave the workforce in the next five to 10 years to retire. However, Canada did not accept enough skilled trade immigrants in 2021 to fill this labour market gap, according to the Conference Board of Canada, which will impact new housing and affordable housing starts.
“Currently, Canada’s federal immigration policy does not link with the country’s labour market needs and that will be a mounting problem in our capacity to build enough homes to meet the high demand over the next five years,” said Tal.
“It’s all fine to table policy to improve our national housing affordability crisis by promising to build more homes and affordable housing — it’s critical — but it’s superfluous when you don’t have the skilled workers to build it,” he added.
Removal of capital gains tax exemption could “disrupt” market
The potential of removing the exemption on capital gains for principal residences could “truly disrupt the market,” according to Jamie Golombek at CIBC Private Wealth.
In light of the growing federal deficit thanks to the COVID-19 pandemic, there has been speculation that Ottawa could remove the capital gains tax exemption on primary residences. If this were to occur within the next 12 to 24 months, this could disrupt retirement plans for millions of Canadians who plan to use the full gains from the sale of their principal property to fund their retirement.
“The primary homes of Canadians represent the greatest store of value for most homeowners and removing a significant portion of that value by eliminating the exemption could cool the market in profound ways,” said Golombek. “While it theoretically will improve government coffers, it would be a blunt blow to the net worth of Canadian households, which in turn could dramatically swing the housing market from hot to cold.”
Should the federal government decide to implement a capital gains tax on the sale of a primary residence in the next five years, they could soften the blow to the market by making it prorated based on how long the home has been owned or the value of the home, the report stated.
