Metro Ottawa Home Price 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
Unfortunately for home buyers, Ottawa prices have accelerated significantly in the past few months.
People planning to sell their home will take heart in the fact that home values are at all time highs. Given the current recession and pandemic, sellers may want to push ahead and sell during the pandemic because there is no guarantee that home prices will regain the current highs any time soon.
A Coronavirus induced recession may inflict long-term economic damage and it is now the primary source of uncertainty for home values.
Metro Ottawa Detached House Prices
House price growth in Ottawa was accelerating in early 2020. The “soft landing” that government policymakers were targeting had become more elusive. We believe politicians were hoping to guide the market toward a typical seasonal real estate cycle with 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 accelerated since 2017 and, today, a benchmark Metro Ottawa condo apartment is still affordable without help from family.
Entering the Coronavirus Recession, there is very little condo supply. When enough supply comes to market, the more expensive, higher quality, and larger (i.e., 2 and 3 bedrooms) apartments will drop in price, and this will depress the values downward for more modest condos.
At Mortgage Sandbox, we would like to see developers building more 4 and 5 bedroom condos. Not everyone can afford to put their family in a house, and for many parents, work-related travel makes it difficult to stay on top of basic upkeep (i.e., mowing lawns, clearing eaves, shovelling sidewalks).
Still a challenge for first-time homebuyers
Ottawa house prices have become much less affordable. A homebuyer household earning $82,000 (the median Metro Ottawa-Gatineau household before-tax income) can get a $310,000 mortgage. That’s enough to buy a benchmark priced condo, but buying a house is out of reach for most locals.
What about the rest of Canada?
Read the Toronto Forecast, Montreal Forecast and the 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, 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.
Our forecast adjustment for COVID-19
None of our primary forecast sources have issued revised forecasts that incorporate the impact of a Coronavirus Recession, so we have adjusted the range of projections based on a rule of thumb provided by Moody’s Analytics. Moody’s Analytics specializes in products to help banks analyze loan and mortgage risks.
In a recent interview, Brendan LaCerda, a Senior Economist with Moody’s Analytics, estimates that each 1% rise in unemployment results in a 4% drop in home prices. Using this ratio, if Canadian unemployment reaches a sustained 11% (a 5% increase), then home prices could drop by 20%.
We have taken a conservative approach and adjusted the 2020 forecasts down by 10% (a prolonged 2.5% rise in unemployment) for the optimistic scenario and down 20% for the pessimistic scenario (an extended 5% rise in unemployment).
How realistic are these unemployment forecasts? On April 9th, the Canadian Parliamentary Budget Officer (PBO) projects Canadian unemployment will reach 15% by June 2020, and that stay as high as 13% by the end of the year.
The PBO may be underestimating the levels of unemployment.
The U.S. Fed projects unemployment in the United States is likely to reach a peak of 30%.
A recent research paper by Alex Bick, “Real Time Labor Market Estimates During the 2020 Coronavirus Outbreak” estimates that U.S. unemployment has already reached 20% and 21% of those who still have their jobs report a decline in earnings.
Joseph Brusuelas, the Chief Economist at audit firm RSM believes the U.S. is almost certainly facing a 20% unemployment rate now.
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 there are many risks in real estate that can impact prices. Risks are events that may or may not happen. As a result, we review a variety of forecasts from leading lenders and real estate firms, and we then present the most optimistic estimates, the most pessimistic prediction, and the average forecast. 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 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 Ottawa forecast. We also have a report on the five factors driving home prices across Ontario.
Affordability
Affordability is a function of:
Home Price Changes: Changes in the 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 (i.e., how much money you can put toward mortgage payments) and interest rates (how big are the mortgage payments).
Increased affordability raises buyer purchasing capacity and puts upward pressure on prices while dropping affordability has the opposite effect.
How have these changed lately?
Home Price Changes
Prices are rising across the Metro Ottawa-Gatineau. Prices growth reduces affordability and creates downward pressure on prices. As a rule-of-thumb, homeownership costs are considered unaffordable when they exceed 40% of household income.
In March 2020, Ottawa homeownership costs were 39% of the median household income. In other words, Ottawa home prices were hitting the maximum levels supported by economic fundamentals, in a low interest rate environment, before the impact of the Coronavirus.
Savings-Equity
Rents were rising faster than incomes, so first-time buyers struggled to come up with down payments.
To add insult to injury, the stock market has dropped dramatically 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 years.
Existing homeowners benefited from price appreciation, so they had more home equity to use when buying a bigger home. That price gain may be short-lived as the Coronavirus is likely to depress prices.
With the Coronavirus containment efforts, the banning of evictions, the conversion of Airbnbs into long-term rentals, and a halt to immigration, we believe rents will drop. That will allow renters to save more toward a future purchase when the market thaws.
Financing
Median Ottawa incomes have not changed materially, but employment levels are dropping.
A U.S. Federal Reserve economist predicts unemployment in the United States could reach over 30%. Canadian unemployment was roughly 6% at the beginning of 2020, and according to an April 21st article in Maclean’s Magazine, Canada’s unemployment rate rose to 22 percent. Apart from layoffs, many salaried employees who have not been laid-off have been asked to take pay cuts.
To mitigate the impact of job losses, the Bank of Canada has reduced rates dramatically, but mortgage qualifying interest rates have not fallen nearly as much.
Job losses from Coronavirus containment efforts are a more powerful force than low mortgage rates because without any income you can not qualify for a mortgage.
Overall Affordability
Despite lower interest rates, the Coronavirus Recession will reduce housing affordability because many people will lose their jobs, temporarily close their businesses, or accept pay cuts.
Presently, prices are barely within reach of a median Metro Ottawa household with an income of $82,000 (before taxes).
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.
Capital inflows raise demand and put upward pressure on prices while capital outflows have the opposite effect. If capital sits invested in real estate nothing is bought or sold, it has no effect on the direction of prices.
Foreign Capital
Ontario implemented a 15% foreign buyer tax to reduce the distorting effect of Foreign Capital flows on local real estate.
Now with the travel bans that are part of Coronavirus containment efforts, we can expect there will be very little foreign investment in Canadian real estate.
Long-term Rentals
As it relates to our analysis, we expect domestic interest in long-term rental income properties will dry up so long as Coronavirus eviction bans are in place. The government has not developed an exit strategy for landlords with rent arrears when social isolation policies are lifted. How will tenants repay three to six months of rent arrears?
Rental investors will simply try to time any future property purchases for the end of Coronavirus containment period, and they will avoid properties with tenants who have outstanding rent arrears.
Short-term Rentals
We are watching short-term rentals closely because travel bans will effectively shut down short-term rentals for the next few months (Canada’s tourist high season).
House Flipping
With Coronavirus containment efforts underway, house flipping will be very risky so we expect serial flippers will stay out of the market until they see a bottom to the market.
It may be 6 months to a year before the market finds its bottom and the flippers emerge to pick up some bargains.
Dark Money
Dark money is the proceeds of crime or money that is transferred to Canada illegally. This includes money earned legitimately that is illegally transferred from countries with capital controls (e.g., China) and legitimate earnings moved from countries who are the subject of international sanctions (e.g., Iran, Russia, and North Korea).
In order to hide the illegal nature of the funds, it is laundered in the real estate market. Sometimes the true owner of the property 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 Capital Flows
The net effect of all the recent changes to Capital Flows will be to reduce inflows of capital toward Metro Ottawa residential real estate, and this will put downward pressure on home prices.
Government Policy
Governments were trying to engineer a ‘soft landing’, but now they are trying to protect against a housing crash by encouraging banks to allow borrowers to defer their mortgage payments up to six months.
COVID-19 Support Measures
Mortgage Payment Deferral
A typical mortgage deferral is an agreement between the borrower and the lender to pause or suspend mortgage payments for one or two months. For the Coronavirus, they have extended this for up to 6 months.
After the agreement ends, your mortgage payments return to normal. The mortgage payment deferral does not cancel, erase, or eliminate the amount owed on your mortgage. The borrower still accrues interest that will have to be paid.
A Canadian with a $250,000 mortgage who defers their mortgage by six months adds approximately $4,000 in accrued interest to their mortgage balance.
Eviction Bans and Suspensions
The Ontario government has suspended the enforcement of evictions indefinitely and Tribunals Ontario will not issue any new eviction orders until further notice. Sheriff's offices have been asked to postpone any scheduled enforcement of eviction orders.
Short-term Rental Regulation
As of 2019, roughly 6,000 Ottawa short-term rentals listed on platforms like Airbnb, and 1,300 “appear to be commercial or investment properties.”
At the end of 2019, the City of Ottawa laid plans for regulating short-term rentals. Here are the highlights:
Short-term rentals are allowed in principal residence only, and rentals in investment properties will be forbidden. This will affect the 1,300 ‘commercial operators’.
A short-term rental applies to any stay of 28 days or less.
Ottawa’s bylaw would include fines for different violations and also require short-term rental platforms to provide data about their hosts and listings on a regular basis.
Releasing Provincial Lands for Development
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.
Overall Government Influence
Overall, the government is now doing everything in its power to save lives while avoiding a property price crash. In a year or two, once, the COVID crisis has receded they will still be trying to bring affordability to the property market.
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, to move for work, or some other reason. The Ottawa Real Estate Board only reports existing home sales.
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.
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 the total number of active listings. 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).
Coronavirus mortality rates (short-term impact)
We know that older Canadians are more vulnerable, and the fatality rates follow a pretty clear trend:
People aged 80 and up have an expected 14.8 percent mortality rate
8 percent of those 70 to 79 succumb to it
3.5 percent of 60 to 69 year-olds are likely to pass away
In 2020, 45% of baby boomers will be over 65 years old, and in Metro Ottawa-Gatineau, roughly 15% of the population is over 65 years old, but in St. Catharines and Collingwood, more than 20% of residents are in their golden years.
Obesity is also a COVID-19 risk factor and 26% of Ontario residents are obese.
The Coronavirus could cause an unusually large number of homes to come to market in areas favoured by retirees. Real estate prices in these areas may be particularly vulnerable.
Coronavirus short-term rentals sold or converted (short-term impact)
Travel bans will effectively shut down short-term rentals for the next few months (Canada’s tourist high season). The drop in bookings may force many owners of apartments primarily used as short-term rentals to sell their condo or repurpose it for long-term rentals adding up to 6,000 to 1,300 homes to the market in the next six months.
We surveyed over 50 Canadian real estate agents and 50% had observed a majority of short-term rentals being listed as long-term furnished apartment rentals and 25% expected AirBnBs owners would sell their homes to cash in the capital gains.
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. Surprisingly, the increases in 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.”
Job losses from Coronavirus containment will worsen this situation. Although the CMHC can help Canadians via Canadian lenders offering options to defer payments, re-amortize mortgages, add interest arrears to your mortgage balances. It will not help overextended Canadians from their credit card debt nor will it protect Canadians who chose to finance their homes with private mortgage lenders. According to the provincial regulator, private lending accounted for around eight percent, or $10.6 billion of all Ontario mortgage transactions reported in 2017 by brokerages.
Baby Boomers Right-sizing?
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 among all provinces surveyed. Another survey 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.”
We prefer the term '‘right-sizing’ because most boomers selling a house are buying luxury apartments with large floor plans in buildings with shared pools, saunas, gyms, and party rooms. That hardly sounds like a step down.
As baby boomers begin right-sizing 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 are to buy 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 excess housing supply.
Pre-sales and Completions
New Construction
There is a record number of homes under construction in Ottawa, and many are nearing completion. As these buildings complete in 2021 and 2022, and people move out of their rental or sell their current home, there will be new supply which should alleviate some of the pressure in the market.
Metro Ottawa Real Estate
Trends and Price Forecast
HIGHLIGHTS
The impact of Coronavirus on Metro Ottawa will likely be very significant but, with a large number of government jobs, it is less vulnerable than other cities.
Metro Ottawa benchmark homes have held their value, but the price of the median home purchase has dropped significantly. This is a sign that buyers are avoiding the top of the market.
Buyer interest was high in the first three months of 2020, but the market has slowed down now that open houses have been suspended.
Short-term rentals in Ottawa (now vacant due to Coronavirus) may be converted to long-term apartment rentals or sold, and this could add unexpected supply to the market.
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?
⇓ The article continues below ⇓
1. Where are Metro Ottawa home prices headed?
Home Price Overview
Unfortunately for home buyers, Ottawa prices have accelerated significantly in the past few months.
People planning to sell their home will take heart in the fact that home values are at all time highs. Given the current recession and pandemic, sellers may want to push ahead and sell during the pandemic because there is no guarantee that home prices will regain the current highs any time soon.
A Coronavirus induced recession may inflict long-term economic damage and it is now the primary source of uncertainty for home values.
Metro Ottawa Detached House Prices
House price growth in Ottawa was accelerating in early 2020. The “soft landing” that government policymakers were targeting had become more elusive. We believe politicians were hoping to guide the market toward a typical seasonal real estate cycle with price growth in the range of 1 to 3% annually – in line with income growth.
⇓ Continued Below ⇓
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Metro Ottawa Condo Apartment Prices
Metro Ottawa apartment prices have accelerated since 2017 and, today, a benchmark Metro Ottawa condo apartment is still affordable without help from family.
Entering the Coronavirus Recession, there is very little condo supply. When enough supply comes to market, the more expensive, higher quality, and larger (i.e., 2 and 3 bedrooms) apartments will drop in price, and this will depress the values downward for more modest condos.
At Mortgage Sandbox, we would like to see developers building more 4 and 5 bedroom condos. Not everyone can afford to put their family in a house, and for many parents work-related travel makes it difficult to stay on top of basic upkeep (i.e., mowing lawns, clearing eaves, shovelling sidewalks).
⇓ The article continues below ⇓
Metro Ottawa Townhouse Prices
Still a challenge for first-time homebuyers
Ottawa house prices have become much less affordable. A homebuyer household earning $82,000 (the median Metro Ottawa-Gatineau household before-tax income) can get a $310,000 mortgage. That’s enough to buy a benchmark priced condo, but buying a house is out of reach for most locals.
What about the rest of Canada?
Read the Toronto Forecast, Montreal Forecast and the 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, 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.
Our forecast adjustment for COVID-19
None of our primary forecast sources have issued revised forecasts that incorporate the impact of a Coronavirus Recession, so we have adjusted the range of projections based on a rule of thumb provided by Moody’s Analytics. Moody’s Analytics specializes in products to help banks analyze loan and mortgage risks.
In a recent interview, Brendan LaCerda, a Senior Economist with Moody’s Analytics, estimates that each 1% rise in unemployment results in a 4% drop in home prices. Using this ratio, if Canadian unemployment reaches a sustained 11% (a 5% increase), then home prices could drop by 20%.
We have taken a conservative approach and adjusted the 2020 forecasts down by 10% (a prolonged 2.5% rise in unemployment) for the optimistic scenario and down 20% for the pessimistic scenario (an extended 5% rise in unemployment).
How realistic are these unemployment forecasts? On April 9th, the Canadian Parliamentary Budget Officer (PBO) projects Canadian unemployment will reach 15% by June 2020, and that stay as high as 13% by the end of the year.
The PBO may be underestimating the levels of unemployment.
The U.S. Fed projects unemployment in the United States is likely to reach a peak of 30%.
A recent research paper by Alex Bick, “Real Time Labor Market Estimates During the 2020 Coronavirus Outbreak” estimates that U.S. unemployment has already reached 20% and 21% of those who still have their jobs report a decline in earnings.
Joseph Brusuelas, the Chief Economist at audit firm RSM believes the U.S. is almost certainly facing a 20% unemployment rate now.
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?”
⇓ Continued Below ⇓
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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. As a result, we review a variety of forecasts from leading lenders and real estate firms, and we then present the most optimistic estimates, the most pessimistic prediction, and the average forecast. 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 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 Ottawa forecast. We also have a report on the five factors driving home prices across Ontario.
READ REPORT: 5-FACTORS DRIVING ONTARIO PRICES
Affordability
Affordability is a function of:
Home Price Changes: Changes in the 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 (i.e., how much money you can put toward mortgage payments) and interest rates (how big are the mortgage payments).
Increased affordability raises buyer purchasing capacity and puts upward pressure on prices while dropping affordability has the opposite effect.
How have these changed lately?
Home Price Changes
Prices are rising across the Metro Ottawa-Gatineau. Prices growth reduces affordability and creates downward pressure on prices. As a rule-of-thumb, home ownership costs are considered unaffordable when they exceed 40% of household income.
In March 2020, Ottawa home ownership costs were 39% of the median household income. In other words, Ottawa home prices were hitting the maximum levels supported by economic fundamentals, in a low interest rate environment, before the impact of the Coronavirus.
Savings-Equity
Rents were rising faster than incomes, so first-time buyers struggled to come up with down payments.
To add insult to injury, the stock market has dropped dramatically 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 years.
Existing homeowners benefited from price appreciation, so they had more home equity to use when buying a bigger home. That price gain may be short-lived as the Coronavirus is likely to depress prices.
With the Coronavirus containment efforts, the banning of evictions, the conversion of Airbnbs into long-term rentals, and a halt to immigration, we believe rents will drop. That will allow renters to save more toward a future purchase when the market thaws.
Financing
Median Ottawa incomes have not changed materially, but employment levels are dropping.
A U.S. Federal Reserve economist predicts unemployment in the United States could reach over 30%. Canadian unemployment was roughly 6% at the beginning of 2020, and according to an April 21st article in Maclean’s Magazine, Canada’s unemployment rate rose to 22 percent. Apart from layoffs, many salaried employees who have not been laid-off have been asked to take pay cuts.
To mitigate the impact of job losses, the Bank of Canada has reduced rates dramatically, but mortgage qualifying interest rates have not fallen nearly as much.
Job losses from Coronavirus containment efforts are a more powerful force than low mortgage rates because without income you can not qualify for a mortgage.
Overall Affordability
Despide lower interest rates, the Coronavirus Recession will reduce housing affordability because many people will lose their jobs, temporarily close their businesses, or accept pay cuts.
Presently, prices are barely within reach of a median Metro Ottawa household with an income of $82,000 (before taxes).
⇓ The article continues below ⇓
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.
Capital inflows raise demand and put upward pressure on prices while capital outflows have the opposite effect. If capital sits invested in real estate nothing is bought or sold, it has no effect on the direction of prices.
Foreign Capital
Ontario implemented a 15% foreign buyer tax to reduce the distorting effect of Foreign Capital flows on local real estate.
Now with the travel bans that are part of Coronavirus containment efforts, we can expect there will be very little foreign investment in Canadian real estate.
Long-term Rentals
As it relates to our analysis, we expect domestic interest in long-term rental income properties will dry up so long as Coronavirus eviction bans are in place. The government has not developed an exit strategy for landlords with rent arrears when social isolation policies are lifted. How will tenants repay three to six months of rent arrears?
Rental investors will simply try to time any future property purchases for the end of Coronavirus containment period, and they will avoid properties with tenants who have outstanding rent arrears.
Short-term Rentals
We are watching short-term rentals closely because travel bans will effectively shut down short-term rentals for the next few months (Canada’s tourist high season).
House Flipping
With Coronavirus containment efforts underway, house flipping will be very risky so we expect serial flippers will stay out of the market until they see a bottom to the market.
It may be 6 months to a year before the market finds bottom and the flippers emerge to pick up some bargains.
Dark Money
Dark money is proceeds of crime or money that is transferred to Canada illegally. This includes money earned legitimately that is illegally transferred from countries with capital controls (e.g., China) and legitimate earnings moved from countries who are the subject of international sanctions (e.g., Iran, Russia, and North Korea).
In order to hide the illegal nature of the funds, it is laundered in the real estate market. Sometimes the true owner of the property is hidden by using property is bought by 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 Capital Flows
The net effect of all the recent changes to Capital Flows will be to reduce inflows of capital toward Metro Ottawa residential real estate, and this will put downward pressure on home prices.
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Refinance?
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Government Policy
Governments were trying to engineer a ‘soft landing’, but now they are trying to protect against a housing crash by encouraging banks to allow borrowers to defer their mortgage payments up to six months.
COVID-19 Support Measures
Mortgage Payment Deferral
A typical mortgage deferral is an agreement between the borrower and the lender to pause or suspend mortgage payments for one or two months. For the Coronavirus, they have extended this for up to 6 months.
After the agreement ends, your mortgage payments return to normal. The mortgage payment deferral does not cancel, erase, or eliminate the amount owed on your mortgage. The borrower still accrues interest that will have to be paid.
A Canadian with a $250,000 mortgage who defers their mortgage by six months adds approximately $4,000 in accrued interest to their mortgage balance.
Eviction Bans and Suspensions
The Ontario government has suspended the enforcement of evictions indefinitely and Tribunals Ontario will not issue any new eviction orders until further notice. Sheriff's offices have been asked to postpone any scheduled enforcement of eviction orders.
Short-term Rental Regulation
As of 2019, roughly 6,000 Ottawa short-term rentals listed on platforms like Airbnb, and 1,300 “appear to be commercial or investment properties.”
At the end of 2019, the City of Ottawa laid plans for regulating short-term rentals. Here are the highlights:
Short-term rentals are allowed in principal residence only, and rentals in investment properties will be forbidden. This will affect the 1,300 ‘commercial operators’.
A short-term rental applies to any stay of 28 days or less.
Ottawa’s bylaw would include fines for different violations and also require short-term rental platforms to provide data about their hosts and listings on a regular basis.
Releasing Provincial Lands for Development
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.
Overall Government Influence
Overall, the government is now doing everything in its power to save lives while avoiding a property price crash. In a year or two, once, the COVID crisis has receded they will still be trying to bring affordability to the property market.
⇓ The article continues below ⇓
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, to move for work, or some other reason. The Ottawa Real Estate Board only reports existing home sales.
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.
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 the total number of active listings. 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).
Coronavirus mortality rates (short-term impact)
We know that older Canadians are more vulnerable, and the fatality rates follow a pretty clear trend:
People aged 80 and up have an expected 14.8 percent mortality rate
8 percent of those 70 to 79 succumb to it
3.5 percent of 60 to 69 year-olds are likely to pass away
In 2020, 45% of baby boomers will be over 65 years old, and in Metro Ottawa-Gatineau, roughly 15% of the population is over 65 years old, but in St. Catharines and Collingwood, more than 20% of residents are in their golden years.
Obesity is also a COVID-19 risk factor and 26% of Ontario residents are obese.
The Coronavirus could cause an unusually large number of homes to come to market in areas favoured by retirees. Real estate prices in these areas may be particularly vulnerable.
Coronavirus short-term rentals sold or converted (short-term impact)
Travel bans will effectively shut down short-term rentals for the next few months (Canada’s tourist high season). The drop in bookings may force many owners of apartments primarily used as short-term rentals to sell their condo or repurpose it for long-term rentals adding up to 6,000 to 1,300 homes to the market in the next six months.
We surveyed over 50 Canadian real estate agents and 50% had observed a majority of short-term rentals being listed as long-term furnished apartment rentals and 25% expected AirBnBs owners would sell their homes to cash in the capital gains.
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. Surprisingly, the increases in 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.”
Job losses from Coronavirus containment will worsen this situation. Although the CMHC can help Canadians via Canadian lenders offering options to defer payments, re-amortize mortgages, add interest arrears to your mortgage balances. It will not help overextended Canadians from their credit card debt nor will it protect Canadians who chose to finance their homes with private mortgage lenders. According to the provincial regulator, private lending accounted for around eight percent, or $10.6 billion of all Ontario mortgage transactions reported in 2017 by brokerages.
Baby Boomers Right-sizing?
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 among all provinces surveyed. Another survey 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.”
We prefer the term '‘right-sizing’ because most boomers selling a house are buying luxury apartments with large floor plans in buildings with shared pools, saunas, gyms, and party rooms. That hardly sounds like a step down.
As baby boomers begin right-sizing 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 are to buy 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 excess housing supply.
Pre-sales and Completions
New Construction
There is a record number of homes under construction in Ottawa, and many are nearing completion. As these buildings complete in 2021 and 2022, and people move out of their rental or sell their current home, there will be new supply that should alleviate some of the pressure in the market.
Pre-sales
Metro Ottawa pre-sales, which 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.
Pre-sales were strong at the beginning of 2020 but we expect they will trend down as showrooms close during the pandemic. When social distancing measures are lifted developers will likely try to entice buyers with price discounts, move-in allowances, and cool amenities!
Popular Sentiment
Wait-and-See Strategy: There's no way of predicting popular sentiment, but as witnessed in the past two years, sentiment can shift quickly.
Nanos Canadian Confidence Index showed a noticeable drop in confidence mid-March, before a state of emergency was announced. Future index announcements will likely be worse.
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.
With Coronavirus containment efforts, open houses may be impossible. However, you can get a Realtor to help you plan small repairs and improvements to your home so that it will be ready when the real estate market thaws.
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, some homebuyers who took a cautious wait-and-see approach in 2019 may have been priced out of the market.
Prices are still trending upward, but Coronavirus containment efforts pull prices down. It is likely that prices will be lower in 2021. Keep in mind that the seasonal real estate cycle usually favours buyers in late summer.
The wild card is the Coronavirus. At this stage, it's difficult to determine how much it will impact the market.
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:
Landlords among most vulnerable homeowners during COVID-19 pandemic (Global, Apr 21)
Virus-driven rate cut could add kerosene to housing market (BNN Bloomberg, Mar 3)
Canada must expose hidden company owners to end 'snow washing,' inquiry hears (CTV, Feb 26)
Assessing whether 2020 will bring a Canadian property tumble (CBC, Dec 19)
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