2020 Metro Ottawa Forecast
HIGHLIGHTS
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This article covers:
Where are Metro Ottawa prices headed?
What factors drive the price forecast?
Should investors sell?
Is this a good time to buy?
1. Where are Metro Ottawa home prices headed?
Home Price Overview
The bad news (for buyers) is that in the past year prices have risen significantly faster than incomes. Prices rose consistently upward throughout 2019 and barely responded to the forces at play in a traditional seasonal real estate cycle. People planning to sell their home will take heart in the fact that waiting one year will have earned them a high rate of return. House prices are still breaking records.
In this section, we review recent price trends for houses, townhouses and condos in Ottawa and then share a forecast developed with input from a range of leading Canadian forecasters. If you would like to skip the current trends, you can scroll ahead to the 2021 Metro Ottawa Home Price Forecast.
Metro Area Detached House Prices
Are Ottawa house prices falling? Not lately.
In 2019, benchmark Metro Ottawa house prices rose closer to $500 thousand with a smooth trend-line. Average prices are more volatile and can be skewed by one or two luxury purchases but they reveal that often a deal can be found in autumn.
The federal, provincial, and municipal governments have implemented measures to cool the market and bring about a “soft landing” but they have been vague in defining the type of soft landing they are targeting. Likely they are seeking price growth in the range of 1 to 3% annually – in line with income growth.
Metro Ottawa Condo Apartment Prices
Metro Ottawa apartment prices have skyrocketed since 2017, not quite as dramatically as Metro Toronto but impressive nevertheless. Today, the benchmark Metro Ottawa condo is affordable without help from the bank of mom and dad.
Metro Ottawa Townhouse Prices
Still a challenge for first-time homebuyers
Ottawa house prices have become even less affordable but not as bad as Metro Vancouver where the benchmark price of a house is $1.4 million.
A first-time homebuyer household earning $82,000 (the median Metro Ottawa-Gatineau household before-tax income) can get a $320,000 mortgage. That’s more than enough to buy a benchmark priced condo without needing a gift from mom and dad. For first-time homebuyers, an Ottawa starter-home is very achievable.
What about the rest of Canada?
Read the Toronto Real Estate Forecast, Montreal Forecast and the Metro Vancouver Forecast.
2021 Metro Ottawa House Price Forecast
At the beginning of 2019, Royal LePage and RE/MAX predicted house prices in Metro Ottawa would rise only 4%. In the end, a benchmark Metro Ottawa house price rose by 12%!!!
For 2020, we expect Metro Ottawa to experience a greater degree of seasonal price variations that are reflective of a more balanced market. The average of the forecasts used in our analysis predicts a modest rise of 5% in 2020 and 4% in 2021. The lowest forecast predicted price growth of 3% and the most optimistic called for a 10% price appreciation.
There is still a pile of risks that could derail the market.
At Mortgage Sandbox, we provide a price range rather than attempting a single prediction because there are many risks in real estate that can impact prices. Risks are events that may or may not happen so as a result, we review a variety of forecasts from leading lenders and real estate firms and we present the most optimistic forecast, the most pessimistic forecast, and the average forecast. Want to learn more about real estate risk? We’ve written a comprehensive report that explains the level of risk in the Canadian real estate market.
Our forecast inputs:
2. What factors drive the price forecast?
Mortgage Sandbox 5 Factor Framework
At the highest level, supply and demand set house prices and all other factors simply drive supply or demand. At Mortgage Sandbox, we have created a five-factor framework for gathering information and performing our market analysis. The five key factors are affordability, capital flows, government policy, supply, and popular sentiment. Below we will summarize how the five factors result in the current forecast but for more detail, we recommend you read the full report of how these factors are affecting prices in Metro Ottawa.
Affordability
Affordability is a function of:
Home Prices: The current market value of the desired home.
Savings-Equity: How much disposable after-tax income you’ve been able to squirrel away plus any equity you have in your existing home.
Financing: This is driven by income levels (i.e., how much money you can put toward mortgage payments) and interest rates (how big are the mortgage payments).
How have these changed lately?
Home prices: Prices in 2020 are 12% higher than the prior-year depending on where the home is located and what type of home it is. Of course, higher prices reduce affordability and add downward pressure on prices. However, given that prices are relatively low, the current price increases aren’t making homes that much less affordable.
Savings-Equity: With rents rising faster than incomes, first-time buyers will struggle to come up with down payments. However, since homes prices have risen, most homeowners seeking to upgrade will have more home equity going in 2020 than they did in 2019.
Financing: Median incomes have not changed materially but mortgage qualifying interest rates dropped about 9% since 2018. Most forecasts predict mortgage qualifying rates will rise in 2020. Lower interest rates are a major factor driving home prices.
Over the course of 2019, prices have risen but people can borrow more so the net effect on affordability is neutral. Prices are still within reach of a median Metro Ottawa household with an income of $82,000 (before taxes) and in 2020 mortgage qualifying interest rates are expected to rise, so we expect affordability to suffer toward the end of 2020 and this would put some downward pressure on prices.
Capital Flows
These represent short-term investment, long-term investment, and recreational demand (i.e, homes not occupied full-time by the owner). Here is where foreign capital, real estate flippers, and dark money come into play. It also includes short-term rentals, long-term rentals, and recreational property purchases.
Foreign Capital Flows are believed to be dropping but it’s not clear that is actually happening. In 2017, Ontario implemented a 15% foreign buyer tax. This may seem like a bold move but Vancouver has a 20% foreign buyer tax and Singapore’s is 20% as well. New Zealand banned foreign ownership and Australia only allows foreign buyers to purchase expensive new pre-sale homes. Compared to these markets Ontario is fairly attractive.
Home flipping activity has declined dramatically in Vancouver (see chart below) and John Pasalis, a prominent Toronto-based analyst, says “The flippers are definitely getting a little bit squeezed now” in Toronto as well. There is no reliable data on Ottawa.
As it relates to our analysis, we expect domestic interest in rental income properties is unchanged. Although there are rules restricting short-term rentals they are not really enforced.
We see no evidence of a diminished role for dark money in local real estate. An eye-opening report by Royal LePage says that new immigrants are buying a high share of properties on the market.
Going forward, we see very little change to Capital Flowing into Ontario real estate with the exception of the City of Toronto where new short-term rental rules could have a downward impact on central Ottawa condos apartment prices.
Government Policy
There has been a lot of policy aimed at housing in recent years but we are mostly concerned with any recent changes that impact the real estate market. Changes made in 2018 and earlier are pretty much already “baked-in”.
In September 2019, the federal liberals created the First-Time Home Buyer Equity Incentive to help people purchase their first home. Under the program, the government offers to put in equity worth 5% or 10% of the home’s purchase price. It is difficult to qualify and it has a lot of strings attached so we expect it will have little effect in the Metro Ottawa market.
The stress test implemented in 2018 effectively reduces the amount home buyers can borrow by 20% and its short term impact has been fully absorbed in home prices but we do believe it may have a long term impact affecting the supply of active listings. First-time homebuyers impacted by the test can simply buy a cheaper home and, luckily for them, home prices have dropped. But first-time homeowners who bought before 2018 may be in a bind. If they try to upgrade to a larger home they will qualify for 20%-30% less mortgage that they were previously qualified for because interest rates have risen and there is a stress test. So these people who might have graduated from their starter home to something larger are forced to sit tight and pay down their mortgage. Across Canada, in every city, fewer people are choosing to sell their homes than in previous years and it is possible that the federal stress test is the root cause.
The provincial government is going to work with municipalities to reduce red tape and plans to sell up to 243 underutilized properties for redevelopment into housing but progress is slow. In January 2019 they sold some land in London. In April 2019, they sold a property in downtown Toronto that may create 700 homes.
Up until now, the desired effect of the municipal and federal policies is to reduce unnecessary demand until more supply can come to the market. The provincial government is focused on supply but has not made much progress. If governments fail to moderate prices, then we should expect more policy interventions and more price uncertainty.
Supply
Supply comes from two sources.
Existing sales: Homes owned by individuals who sell them to upgrade, to move for work, or for some other reason. This is the primary source of detached houses since relatively few new detached houses are being built in Metro Ottawa. Only existing home sales are reported by the real estate board.
Pre-Sales and Construction Completions: Usually, up to 70% of new homes are sold via pre-sales before the construction is completed. These are predominantly apartments and townhomes. Data on pre-sales is private and more difficult to find whereas home completions are reported by the government.
Months of Supply of Existing Homes
The ratio of active listings to purchases can provide valuable insight into market conditions. Unfortunately, the Ottawa Real Estate Board does not publish these statistics. Essentially, a market with 5 to 9 months of housing supply listed for sale is in a balanced market where neither buyers nor sellers have a distinct negotiating advantage. In a balanced market, home prices rise moderately in the springtime and usually dip in the winter and year-over-year price increases tend to match rises in incomes (i.e., 1 to 2% annually). Ottawa is not in a balanced market, but we wish we could provide more information on these supply trends.
Baby Boomers Downsizing?
In 2020, 45% of baby boomers will be aged 65 and over and, according to a recent survey, almost half (49 percent) of all Ontario Boomers respondents said they plan to move into a smaller home as they near or enter their golden years, the highest rate in among all provinces surveyed. A recent report on all Canadian Boomers from RBC says, “Over the coming decade, we expect baby boomers to ‘release’ half a million homes they currently own—the result of the natural shrinking of their ranks, and their shift to rental forms of housing, such as seniors’ homes, for health or lifestyle reasons.”
As baby boomers begin downsizing and list their million-dollar homes for sale they will add supply in what is considered the luxury market. If not enough Gen-X and millennial buyers can be found for these expensive homes, there is a risk that this may depress prices at the top of the market, which will then compress prices for townhomes and condo apartments.
In the near-term supply is tight, but in the medium-term, there are risks of higher than expected supply.
Mortgage Delinquencies and Foreclosures
The most recent data indicates that more Canadians are missing their monthly payments and job growth has been healthy. Some economists have been warning of a recession and even without a recession, it appears more Canadians are over-extending themselves. Even though delinquency rates are relatively low, it is surprising that the increases in mortgage delinquencies are led by Ontario and British Columbia, and not Alberta.
According to Equifax, the credit bureau company:
“Mortgage delinquencies have also been on the rise. The 90-day-plus delinquency rate for mortgages rose to 0.18 percent, an increase of 6.7 percent from last year. Ontario (17.6%) led the increases in mortgage delinquency followed by British Columbia (15.6%) and Alberta (14.8%). The most recent rise in mortgage delinquency extends the streak to four straight quarters.”
A recent survey by MNP reported a staggering number of Canadians are stretched to their limits:
“Over 30 per cent of Canadians say they’re concerned that rising interest rates could push them close to bankruptcy, according to a nationwide survey conducted by Ipsos on behalf of MNP, one of the largest personal insolvency practices in the country.”
Pre-sales and Completions
New Construction: There is a record number of homes under construction and many will compete in 2020 and 2021. As these buildings complete, and people move out of their rental or sell their current home, this new supply should alleviate some of the pressure in the market.
Pre-sales: Pre-sales, which are purchases of brand-new homes from developers, have trended down substantially since 2018. Since developers need to sell at least 70% of a project to secure financing and begin construction, they are trying to entice buyers with price discounts, move-in allowances, and cool amenities. The strong construction starts in Ottawa imply that pre-sales are hot and are absorbing some of the demand in the market.
Popular Sentiment
Buyers who were sitting on the sidelines are now springing into action. The combination of high demand and low supply is holding prices up. Demand is difficult to control but if people begin to get cold feet (like they did in Toronto in 2017) or the baby boomers decide to finally cash in their property gains, then the market could tilt back in balance. There’s no way of predicting seller sentiment but, as witnessed in 2008 and 2017, sentiment can shift quickly.
3. Should Investors Sell?
From a seller’s perspective, there are more changes in the market that influence prices downward so now may be a better time to sell than in two years and the seasonal real estate cycle usually favours sellers in the first half of the year.
Sellers should always consult a mortgage broker early to prioritize flexible loan conditions and reduce the risk of mortgage cancellation penalties. Find out more about the benefits of a mortgage broker.
4. Is this a good time to buy?
With accelerating prices, homebuyers that took a cautious wait-and-see approach in 2019 have been penalized. With prices continuing to trend upward, 2020 definitely appears to be a favourable time to buy. Looking forward to 2021, prices may be higher or lower but they are unlikely to rise as dramatically as they did in 2016 and 2017. Also, keep in mind that the seasonal real estate cycle usually favours buyers in late summer.
If you are thinking of buying just be sure to drive a hard bargain and pay as close to market value as you can. As well, when it comes to financing, don’t bite off more than you can chew.
Buying a home is a big decision, so check out Mortgage Sandbox’s Canadian Homebuyer Guide so we can walk you through the end-to-end process and get you ready to buy your new home!
Here are some recent headlines you might be interested in:
‘Our new reality’: Higher Ottawa housing prices projected in 2020 (Ottawa Business Journal)
Are we in a housing bubble? Not really. It just feels like it. (Ottawa Citizen)
Real estate market hits new heights in Ottawa-Gatineau (CBC)
‘Room for a lot more buildings’ in booming Ottawa rental market (Ottawa Business Journal)
Housing data reveals ‘growing divergence’ between eastern and western Canada (Global News)
Canada’s Risky Housing Market Has Traded Places With The U.S., IMF Says (Huffpost)
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