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It’s been a year of running out of adjectives to describe Canadian real estate during the COVID-19 pandemic.
Low interest rates and insatiable demand helped break the annual national sales record by October and prices are up the most ever year over year.
RBC says housing affordability hit a 31-year low in 2021.
“Homebuyer demand is supercharged and inventories are near historical lows in virtually every market, creating intense competition between buyers and pressured prices up,” said RBC senior economist Robert Hogue, in a new report.
“These conditions have widely eroded housing affordability in the past year.”
Ontario was already a tough market to get into before the pandemic, but many are now locked out completely. Hogue says we could see these priced-out buyers migrate to areas like the Prairies and Atlantic Canada, which didn’t experience the same kind of price explosion.
“If I were to use one word to describe 2021 it would be a frenzy, 2021 was like Black Friday,” Nasma Ali, founder and realtor at One Group which serves the Greater Toronto Area, told Yahoo Finance Canada.
The suburbs and beyond were particularly hot as buyers sought out more space. Ali says the massive price gains aren’t sustainable. She is hoping for a more balanced market in 2022 but expects demand to continue to outpace supply until the spring and summer.
“By July things will slow down, especially August," said Ali.
“All the people that really wanted to move because of COVID, by then that will be kind of the last batch.”
Remarkable mortgage market
Ron Butler is a founder at Butler Mortgage and has been in the mortgage industry for 26 years. He says the mortgage market was remarkable as housing broke records, with many brokerages seeing their total business rise 50 per cent from the year before.
“That's not even growing or acquiring, that's just sort of same-store sales," Butler told Yahoo Finance Canada.
“That's an amazing number. I mean, that's not a natural course of business to be up 50 per cent."
Butler says home price gains in some provinces have been unimaginable.
“It's something that is hard to fathom,” said Butler
“There is no way that regional prices should go up 40 per cent a year. it's just not rational, it's not reasonable.”
Butler says he expects low inventory to keep prices elevated in the early part of 2022 but suspects something will happen in the first two quarters of 2022.
“Some kind of government intervention, some sort of rule change, certainly in all likelihood prime rate will go up at some point,” he said.
“And governments may step in through their bank regulators and through CMHC, to modify some of the existing rules to do with house financing to choke back on this over-exuberant growth.”
But Butler cautions that there will be a lag after changes like that before prices respond. Prices have even jumped during the early days of past announcements as buyers try to jump in before the new rules take effect.
Cracking down on investors
Investors couldn’t pass up real estate’s juicy returns and came back into the market in greater numbers. Teranet recently said a quarter of Toronto real estate is bought by investors and some realtors report even higher levels of investor interest. It also says one in four Ontario buyers are investors with multiple properties.
That’s who Ben Rabidoux, founder of North Cove Advisors and Edge Realty Analytics, expects will be targetted first.
“Mortgage regulators will tighten to target investors,” Rabidoux told Yahoo Finance Canada.
He says to expects OSFI to target them in a number of possible ways. The regulator could raise the required down payment on secondary properties from 20 per cent to up to 35 per cent. Borrowed funds, including HELOCs and property refinances, could be prohibited. He says higher risk weightings for mortgages on non-owner occupied homes and fewer maximum ‘doors’ per borrower are also a possibility.
Rabidoux says this could have a material effect on demand and remove a lot of speculative froth.
“It would also disproportionately hurt the likes of CIBC which has seen uninsured mortgage growth surge to 23 per cent year over year recently on the back of a major push into rentals... the loan segment that coincidentally got them in trouble with OSFI back in 2017,” he said in his latest housing report.
“Based on recent comments regarding ‘deteriorating underwriting’ as evidenced by rising prevalence of high loan-to-income borrowing, there’s a chance that OSFI may also add a debt-income limit to the stress test and could also target HELOCs by either forcing banks to include any undrawn portion in debt service ratio calculations.”
With that said, barring a very significant shock Rabidoux says he expects markets to move higher until at least the second half of the year.
Beyond Toronto and Vancouver
The Greater Toronto Area and Metro Vancouver are the country’s biggest housing markets, so they naturally get the most attention.
It's also where Royal LePage expects prices to rise the most in 2022, forecasting 11 per cent higher prices in the GTA and 10.5 per cent in Vancouver.
But it thinks Halifax will be nipping at the bigger cities' heels. Royal LePage forecasts prices will increase 10 per cent year-over-year to $519,200.
“Halifax has approximately two weeks of available inventory. The chronic supply shortage is impacting sales volumes, which I expect will be lower in 2022, despite continued strong demand from buyers within and outside of the Maritimes,” said Matt Honsberger, broker and owner, Royal LePage Atlantic in the company’s 2022 housing forecast.
“Out-of-province demand remains a main driver of price appreciation, and is expanding to areas outside of the city centre, including Annapolis Valley and other recreational regions a short drive from downtown.”
Royal LePage expects Edmonton prices to rise 5 per cent. It expects Calgary, Winnipeg, and Regina to rise 6 per cent.
What governments need to do about affordability
Governments at various levels have vowed to tackle housing affordability. It was a key issue during the federal election, and the Liberals say housing measures will be part of the upcoming federal budget. Ontario assembled a task force and Toronto approved an empty home tax.
Paul Kershaw, UBC professor and founder of an advocacy group for young Canadians, Generation Squeeze has called on governments to take action on housing affordability for years.
“I want to see all levels of government state explicitly that to restore affordability for all, we need home prices to stall, so that earnings have a chance to catch up,” Kershaw told Yahoo Finance Canada.
“If we don’t have clarity about what our country, provinces and cities want from home prices in the years ahead, we simply won’t be able to ensure that all Canadians can afford a home that meets their needs by 2030.”
He cautions against getting lost in policy change details instead of focusing on the big picture.
“For the big picture, we need housing to be for homes first – much more than we need housing to provide good returns on investment," said Kershaw.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.