Metro Montreal Home Price Forecast - Jan 2021
HIGHLIGHTS
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This article covers:
Where are Metro Montreal prices headed?
What factors drive the price forecast?
Should investors sell?
Is this a good time to buy?
1. Where are Metro Montreal home prices headed?
Home Price Overview
Metro Montreal has a population of roughly 4.3 million and was ranked 41 of the best 100 cities in the world.
Home prices in Montreal have accelerated significantly in the past few months, pushing more potential home buyers out of the market.
People planning to sell their home will take heart because home values are at all-time highs.
Given the current recession and a Wave 2 of infections, sellers may want to push ahead and sell during the pandemic because there is no guarantee that home prices will maintain current values over the next two years.
The pandemic related restrictions, the resulting recession, and the potential for a third wave of infection are now the primary source of uncertainty for home values.
Metro Montreal Detached House Prices
House price growth in Metro Montreal has accelerated through 2020. The “soft landing” that government policymakers were targeting has not materialized, nor have promises of a ‘market crash.’
The median house price has been flat for the past few months and this may be an early indicator that price increases will decelerate in the Spring and may even drop toward mid-2021.
We believe politicians are hoping to guide the market toward a typical annual real estate cycle with price growth in the range of 1 to 3% annually – in line with income growth.
Market Risk
House price growth in Montreal has been very high. Overall, according to the CMHC, there is a moderate risk of a price correction in Montreal.
Metro Montreal Condo Apartment Prices
Metro Montreal apartment prices are continuing upward. Uninterrupted by the twp waves of the pandemic.
With more people working-from-home, we expect developers will begin marketing larger (i.e., 2 and 3 bedrooms) apartments to meet buyer preferences. As the supply of more generous floor plans comes to the market, it may depress the values for small floor plan condos.
At Mortgage Sandbox, we would like developers to build 4 and 5 bedroom condos because:
Not everyone can afford to buy a house for their family.
Canadians who now work from home need more room to segregate workspace from living space within their homes.
Many Canadians with longer working hours find it challenging to stay on top of necessary house upkeep (i.e., mowing lawns, clearing eaves, shovelling sidewalks).
Many people prefer to live in higher-density neighbourhoods with all the essential amenities within walking distance.
In a city like Montreal building a house usually entails tearing down a house. Building houses results in more waste and fewer new homes.
Still a challenge for first-time homebuyers
A Montreal household earning $52,500 (the median Metro Montreal household before-tax income) can get a $300,000 mortgage. That’s enough to buy a benchmark priced condo, but buying a house is out of reach for most locals.
Metro Montreal House Price Forecast
There is a lot of uncertainty in the forecasts for 2021 and 2022. Many of the forecasters we've surveyed have different expectations for:
How likely is the third wave of COVID-19 infections and associated restrictions?
Will the economy will re-open in the 'new normal' in June or December 2021?
Will the federal government succeed in achieving its aggressive immigration targets during a pandemic and with high unemployment?
Since the mortgage payment deferrals expired in October, will the anticipated distressed home sellers appear in the housing market?
As a result of their varying assumptions, some forecasters expect prices to continue rising, while others expect are more likely prices to drop.
For example:
A Royal LePage survey found that their real estate agents expect Montreal values to rise by 6%.
The highest forecast for Canadian home prices in a September Reuters poll of 16 economists was price growth of 10% in 2021, while the lowest prediction called for a 10% drop. Roughly half the economists anticipated a decline while half expected a rise.
Moody’s Analytics, which develops mortgage risk software for Canadian banks, predicts a drop of nearly 7% drop in Montreal.
Moody’s didn’t attempt to pinpoint the timing of the decline in values. However, our research shows that most past declines in Canadian home values have begun between May and July. Traditionally, there is less supply (fewer listings) between February and May, which puts upward pressure on prices.
CMHC, the government housing agency, predicts a ‘peak-to-trough’ drop of between 9% and 19%. They expected government aid and mortgage deferrals would cushion the blow in 2020 and that the market would be impacted in 2021 with a 2022 recovery.
There is no consensus among economists. Market sentiment and government stimulus have led to price acceleration and record home purchases even though most economic fundamentals have faltered.
We tend to place a little more weight on CMHC and Moody’s Analytics. They may be projecting lower values in the future, but:
CMHC sells insurance to banks to help limit their losses if a mortgage goes bad.
Moody’s Analytics sells software to banks to help them assess the risk of their mortgage portfolios.
Both organizations are unique in their ability to see market conditions across the regions and all the banks.
In the next section, we examine the five factors that drive these forecasts. They will help explain why several forecasters are anticipating price drops.
For a more thorough comparison of the Coronavirus Recession to the Great Recession and the Great Depression and their impacts on property prices, check out our recent article: “Should I sell my home today?”
At Mortgage Sandbox, we provide a price range rather than attempting a single prediction because many real estate risks can impact prices. Risks are events that may or may not happen. As a result, we review various forecasts from leading lenders and real estate firms, and we then present the most optimistic estimates, the most pessimistic prediction, and the average forecast. Do you want to learn more about real estate risk? We've written a comprehensive report that explains the level of uncertainty in the Canadian real estate market.
Our forecast inputs:
2. What factors drive the price forecast?
Mortgage Sandbox 5 Forces 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 core demand, non-core demand, government policy, supply, and popular sentiment.
In the long-run, the market is fundamentally driven by economic forces. Still, sentiment can propel prices beyond economically sustainable levels in the short-run.
Below we will summarize how the five factors result in the current Montreal forecast.
Core Demand
Core demand is a function of:
Population Growth: The pace at which people are moving to an area. An average of roughly 2.5 people live in one household.
Home Price Changes: 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: Your maximum mortgage is calculated using income, monthly expenses, and interest rates.
Population Growth
Quebec’s population is almost always growing, but the rate of growth is important for our analysis.
If population growth is the same or lower than in the past, then there is less upward pressure on prices.
At the moment, population growth is lower in Quebec. As a result of ongoing COVID-19 related travel restrictions, we may observe lower growth through to mid-2021.
READ: Fewer People = Less Demand : Easing Population Growth to Weigh on Housing, TD Bank
Home Price Changes
House prices are near all-time records across Metro Montreal. Prices growth reduces affordability and reduces the pool of qualified potential buyers. In an ironic twist, this means rising prices create downward pressure on prices.
As a rule-of-thumb, homeownership costs are considered unaffordable when they exceed 40% of household income.
In March 2020, Montreal homeownership costs were 43.4% of the median household income. In other words, Montreal home prices had exceeded economic fundamentals, in a lower interest rate environment, before the impact of the Coronavirus.
House prices have continued to rise, and this forces us to contemplate if or when economic fundamentals might re-exert their influence on the market.
Savings-Equity
Equity
Existing homeowners have benefited from rising values while they pay down their mortgages so that today they have more home equity to use when buying a bigger home.
Savings
Rents are rising faster than incomes (3.6 percent annually), so first-time buyers will struggle to come up with down payments.
The stock market dropped because of the pandemic, so anyone who managed to save a down payment and invested it in ‘blue-chip stocks’ may now find out they’ll need to save for a few more months or years.
Financing
Mortgage Interest Rates
The Bank of Canada has reduced rates dramatically, but mortgage qualifying interest rates haven’t fallen nearly as much. Also, lenders have tightened their borrowing guidelines.
Overall, lower rates have not increased home-buying budgets very much.
Employment and Incomes
Brendan LaCerda, a Senior Economist with Moody’s Analytics, estimates that each 1% rise in unemployment results in a 4% drop in home prices. Until now, the impact of unemployment has been delayed by the CERB and mortgage payment deferral program.
Using this ratio, a prolonged 2.5% rise in Montreal unemployment to 8% would result in a 10% price drop and a 5% rise in Quebec unemployment to 10.5% would lead to a 20% fall in values.
The ‘official’ unemployment figures do not include unemployed people who are not looking for work (e.g., people who work in industries that have not fully reopened like tourism or hospitality). The true ‘effective’ levels of unemployment are higher.
Even after people get re-hired, they will need to be on the job for three months before they qualify for a mortgage pre-approval.
Small businesses and commission salesforce have to show 2 years of consistent income to be eligible for a mortgage. Unless banks change their lending policies, 2020 will drag down their mortgage qualifying income until mid-2023 (when they file their 2022 taxes).
Homeownership Costs
In 2020, before factoring in the pandemic, Montreal raised property taxes by 2% and the City of Montreal has proposed a tax freeze in 2021.
City revenues have been hit hard by the pandemic and the city now faces a $500 million deficit, and while the provincial and federal governments may provide support, homeowners will likely be expected to help as well. Residents should expect property tax increases or reduced services to make up for the pandemic revenue shortfalls. If cities put off infrastructure and capital spending, then the deferred costs will eventually result in higher taxes in the future.
Property taxes are factored into your mortgage affordability calculations, so an increase in taxes lowers home-buying budgets.
Overall Core Demand
Despite lower interest rates, due to the Coronavirus' impacts, short-term core demand for homes will likely be much lower as we head into 2021.
Non-core Demand
This represents 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.
Since non-core demand is ‘optional’ (i.e., not used to shelter your own family), it is more volatile than core demand.
Foreign Capital
Since British Columbia and Ontario introduced foreign home buyer taxes, foreign capital flowing into Montreal properties has grown dramatically.
In the near-term Coronavirus related international travel restrictions will significantly reduce foreign investment in Canadian real estate.
Long-term Rentals
Rental investments are a significant driver of home prices, but now rent rates are falling. Some potential rental investors may hold off on buying until the rental market stabilizes.
Short-term rentals
International travel restrictions will make many short-term rentals unprofitable for the foreseeable future. Statistics show that, since the travel restrictions were put in place, international travel to Canada has dropped 98 percent.
Fewer investors will be buying real estate for short-term rentals until travel restrictions are lifted.
House Flipping
With rising uncertainty, house flipping has become riskier. We expect many professional flippers will stay away from the market until it stabilizes.
Dark Money
Dark money is the proceeds of crime or money that are transferred to Canada illegally. This includes money earned legitimately and illegally transferred from countries with capital controls (e.g., China) and legitimate earnings moved from countries subject to international sanctions (e.g., Iran, Russia, and North Korea).
To hide the illegal nature of the funds, it is laundered in the real estate market. Sometimes, the property's true owner is hidden by using a Straw Buyer, and other times the property is owned by a shell company.
Sometimes a real estate agent or lawyer will accept the illegal cash to help the nefarious individuals hide its true origins. In 2015, a B.C. realtor was caught with hundreds of thousands of dollars in her closet at home.
We see no evidence of a diminished role for dark money in local real estate.
Overall Non-core Demand
Capital inflows toward residential real estate for non-core uses have declined. This reduces upward pressure on Metro Montreal home prices.
Government Policy
Governments have shielded Canadians and the housing market from the impacts of the pandemic induced recession using:
All of these programs, except for CEWS, have now expired.
Beneficial Ownership Registry
Quebec rules to identify foreign resident beneficial owners come into effect in October 2020.
A foreign resident buyer tax may follow soon after. The new disclosure rules require buyers to disclose their citizenship and residency status. If a company or partnership purchases the property, then the notary must determine if a foreign resident owns 50 percent or more of the property. For trusts, the notary needs to determine if the trust's beneficiary is a resident of Canada. Already, most experts can spot some loopholes in this set-up, but the government is trying.
Foreign Buyer Taxes
The federal government is contemplating foreign ownership taxes, and the Quebec government is beginning to measure international buyer influence in the market accurately, which could be the first step leading to a foreign buyer tax. The desired effect is to reduce unnecessary (non-core) demand until more supply can come to the market.
Overall Government Influence
The government has now unwound many of the programs supporting home values through the recession. Compared to three months ago, there is now much less support from the government to maintain home values.
Supply
Supply comes from two sources.
Existing sales: Existing home sales are sales of ‘used homes.’ They are homes owned by individuals who sell them to upgrade, move for work, or for some other reason. The real estate board only reports existing home sales and listings.
Pre-Sales and Construction Completions: Most new homes are sold via pre-sales before the construction has started. These are predominantly apartments and townhomes. Data on pre-sales is private and difficult to find, but construction starts (reported by the government) are a very accurate lagging indicator of pre-sale activity.
Rising supply releases the upward pressure on prices caused by demand.
Months of Supply of Existing Homes
Supply is tight, and Montreal is a ‘seller’s market.’
There are a rising number of condo apartments and townhomes for sale. If the rise in active listings is sustained, it could tilt the markets for apartments and townhomes into a ‘balanced market.’
In a balanced market, there should be fewer bidding wars and no-subject offers. Sellers will, once again, need to compete against each other. In a balanced market, the quality of your real estate agent becomes more important because you are negotiating on an equal footing. Preparation and strategy play a greater role in negotiations.
Mortgage Delinquencies and Foreclosures
Data indicates that more Canadians are missing their monthly payments and most mortgage payment deferrals will expire in September and October.
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.”
A separate survey by MNP reported a staggering number of Canadians are stretched to their financial 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.”
Statistics in August showed that 10 percent of Montreal mortgage holders were still unable to make their mortgage payments. Mortgage deferrals expire after 6 months and that means by October many of these deferrals will have expired. Unless these borrowers have found new jobs, they will fall into default.
Pre-sales and Completions
New Construction
Montreal built a record number of homes in 2020 however the city didn’t experience record population growth, perhaps supply will catch up with demand?
The city also has more homes in the pipeline than ever before.
As buildings under construction complete in 2021 and 2022, 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
Metro Montreal pre-sales are purchases of brand-new homes from developers. Typically, a developer must sell 70% of homes in a building before they can starts construction so housing starts are a good indicator of successful pre-sales.
In 2020, housing starts have eclipsed the record set in 2019.
Popular Sentiment
Popular sentiment can be volatile and easily influenced by the latest headlines. Sentiment can shift quickly, as witnessed in the past two years.
Canadian Consumer Confidence
The Ipsos-Reid and Nanos Canadian Confidence Index showed a noticeable drop in 2020 and are now on the mend.
Canadian consumer confidence has improved significantly, buoyed by positive views on real estate. Half of Canadians believe home prices in their neighbourhood will rise over the next six months even though most expect the economy will still be in the dumps.
Although consumer sentiment is a key factor contributing to real estate price trends, consumer sentiment on its own is not an accurate predictor of prices.
Coronavirus Containment
Quebec is struggling to contain the second wave and we expect localized restrictions and lockdowns. The reimposition of restrictions will likely depress sentiment.
Canada has not yet flattened the curve on wave 2. Several vaccines have been approved and Prime Minister Trudeau has announced that, if all goes well, most Canadians will be vaccinated by September 2021.
Taking into account the time between now and September plus the spread of the UK and South African variants which are more infections, we should probably be preparing ourselves mentally for a third wave of infections before settling into the “new normal”.
The greatest controllable challenges at this stage are:
Anti-maskers - we should be happy to inconvenience ourselves if it means we can avoid the third wave of infection.
Vaccine supplies, shipping logistics, and set-up of enough vaccination sites.
Anti-vaxxers - a quarter of Canadians don't want to take the COVID-19 vaccine.
Vulnerable Canadians will be vaccinated next – more than 25% of Canada’s population (almost 10 million people) is considered at higher risk.
Federal government guidance prioritizes early COVID-19 vaccination for the following groups:
residents and staff seniors’ care homes
adults 80 years of age and older, followed by adults 70 years older
health care and personal support workers
adults in Indigenous communities
As additional vaccines become available, inoculations will be extended to:
homeless shelters
correctional facilities
housing for migrant workers
essential workers who face additional risks to maintain services for the functioning of society
A study headed by Dr. Kristine A. Moore, medical director at the University of Minnesota Center for Infectious Disease Research and Policy, explored scenarios for the pandemic's evolution. Her research team predicted that the second wave in the Fall of 2020 was a likely scenario.
Now that we are in the midst of the second wave, we need to look ahead to what’s next.
Scenario 1 - Second Wave is the Last Wave
Canadians continue to follow health policy guidance and wear masks and continue social distancing until enough people are vaccinated to provide herd immunity. The second wave is the last.
Scenario 2 - Larger Third Wave in 2021
By May 2021, most of the vulnerable have been vaccinated, many Canadians will stop wearing masks and social distancing. They will hold the mistaken belief that vaccinating the most at risk is good enough.
Lax social distancing plus the introduction of more infectious COVID variants lead to the third wave of infections. The lives of many people who are vulnerable, but didn’t know it, would be at risk in this scenario. The provinces would likely have to reimpose local restrictions and lockdowns.
Businesses would have an opportunity to re-open between waves.
Scenario 3 - Extended Second Wave
As a result of the new more infectious variants and restriction non-compliance, we never truly overcome the second wave using social distancing. Instead, it is finally beaten using vaccinated herd immunity.
High case counts over an extended period of time mean that governments will leave restrictions in place for longer.
3. Should Investors Sell?
From a seller’s perspective, more changes in the market that influence prices downward, so now may be a better time to sell than in two years, and the annual 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.
Planning to Sell? Check out our Complete Home Seller’s Guide.
4. Is this a good time to buy?
Homebuyers who waited now benefit from lower interest rates and prices that are unchanged from a year ago. They can now get a larger mortgage and buy more house with their larger buying budget.
Coronavirus containment efforts may make it difficult to visit a bank or view homes. However, if you are considering a purchase, you can get a mortgage pre-approval from a mortgage broker and ask a Realtor to monitor the market, all without leaving your home. Then you’ll be ready when the ‘fog clears’.
Looking ahead to 2021, prices are unlikely to rise dramatically, so buyers shouldn’t feel the need to rush to an offer. Also, keep in mind that the annual real estate cycle usually favours buyers in late summer.
If you are going to buy, be sure to drive a hard bargain and cover your bases with smart and educated decisions. Don’t bite off more than you can chew.
Are you Planning to Buy? Check out our Complete Home Buyer’s 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:
New CMHC report says Canadian housing market could see a 14% plunge (The Star, Jan 21)
Quebec tenants' group calls for freeze on rent increases in 2021 (Montreal Gazette, Jan 20)
These are Canada's fastest growing communities as cities see record exodus (CTV, Jan 19)
Toronto, Montreal see exodus pick up pace, aggravated by COVID-19 pandemic (Globe and Mail, Jan 22)
The stresses that changed Canadian and Ottawa real estate in 2020 (Ottawa Citizen, Jan 2)
Despite pandemic, Montreal's real estate market had a record year (CBC, Dec 31)
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