Metro Montreal Home Price Forecast - July 2020
HIGHLIGHTS
The impact of Coronavirus on Metro Montreal will likely be very significant.
Homebuyers stayed on the sidelines through March, April, and May, but in June they jumped back into the market with both feet. In coming months we will learn if this is a trend or 3-months of backed-up demand piled into one month.
We are watching several key risks:
The possibility of a second wave and corresponding lockdown in Canada.
How well the U.S. manages the pandemic - roughly 25% of the Canadian economy relies on exports south of the border. As well, most tourists to Canada are American.
The impact of expiring eviction freezes and mortgage payment deferrals. These are delaying the true impact of the pandemic on housing. They can not be extended indefinitely.
Short-term rentals in Montreal (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 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
Unfortunately for home buyers, Montreal 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 Coronavirus Recession, 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.
Coronavirus is now the primary source of uncertainty for home values.
Metro Montreal Detached House Prices
House price growth in Montreal 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 Montreal Condo Apartment Prices
Metro Montreal apartment prices have been rising since 2017. Today, a benchmark condo apartment is still affordable without help from family.
Entering the Coronavirus Recession, there was 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
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.
2021 Metro Montreal House Price Forecast
At the beginning of 2019, Royal LePage predicted Montreal homes prices would rise 6%, and the Quebec Federation of Real Estate Boards (QFREB) predicted house prices would rise only 3 to 4%. In the end, a benchmark Metro Montreal house gained 9%, and condo apartments rose 11%. The forecasters were too conservative.
The best markets were for houses on the Island of Montreal, which rose 12% and condos in Vaudreuil-Soulanges, which gained 21 percent!!! The weakest house market was the North Shore, where house values only rose 3.5% and Laval, where apartments barely reached 1% price growth. The difficulty with forecasts is that real estate is local and property type matters.
The average of the forecasts used in our analysis predicted 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 an 8% price appreciation.
A second wave containment effort?
Two key assumptions underpin the more optimistic home price forecasts:
COVID-19 control measures in in Canada will be gradually relaxed — but not eliminated entirely — over the remainder of 2020. There will not be a second or third “lockdown” in response to new waves of infection.
Unemployment will not exceed 15%.
At Mortgage Sandbox we are placing greater emphasis on the forecasts that include a ‘second wave” of infection.
Dr. Anthony Fauci, director of the U.S. National Institute of Allergy and Infectious Diseases, believes a second wave of coronavirus infection is "inevitable."
A study headed by Dr. Kristine A. Moore, medical director at the University of Minnesota Center for Infectious Disease Research and Policy, warns that the pandemic will not be over soon and that people need to be prepared for possible periodic resurgences of disease. Optimistically, a vaccine will not be widely available until mid-2021 and 70% of the population would need to be infected to provide herd immunity. Unfortunately, more than 30% of the population have conditions that make them vulnerable.
Our forecast adjustment for COVID-19
In a presentation to the Federal Standing Committee on Finance on May 19th, CMHC’s CEO revealed that the agency now expects average Canadian home prices to fall between 9% and 18%.
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).
In a March 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, a prolonged 2.5% rise in Quebec unemployment to 7.5% would result in a 10% price drop and a 5% rise in Quebec unemployment to 10% would lead to a 20% fall in values.
The ‘official’ unemployment figures unemployed people who are not looking for work (e.g., people who work in industries that have not fully reopened like tourism or hospitality). ‘True’ levels of unemployment are higher.
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 that can impact real estate 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 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, but in the short-run, sentiment can drive prices beyond economically sustainable levels.
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 (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?
How have these changed lately?
Home Price Changes
Prices are rising across the board. Prices growth reduces affordability, pricing some potential buyers out of the market, and this creates downward pressure on prices. However, given that prices are already very high, the current price increases will not make homes significantly less affordable.
Savings-Equity
Rents are rising faster than incomes (3.6 percent annually), so first-time buyers will struggle to come up with down payments.
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.
However, since homes prices have risen, most homeowners seeking to upgrade will have more home equity in 2020 to deploy toward the purchase of an upgrade.
Financing
Median incomes have not changed materially, but employment levels are dropping. To mitigate the impact, the Bank of Canada has reduced its ‘Target Rate’ dramatically, but mortgage qualifying rates have not fallen nearly as much.
Lower interest rates were a significant factor driving up home prices between 2018 and 2019.
Before the Coronavirus Recession, the Bank of Canada believed one of the most critical risks to “Canada’s financial system remain a severe nationwide recession”.
Unemployment will weigh on home prices throughout 2020 and 2021. Even after people get re-hired, they will need to be on the job for three months before they will qualify for a mortgage pre-approval. As well, small businesses and commission salesforce have to show 2 years of consistent income to qualify for a mortgage. Unless banks change their policies, 2020 will drag down their mortgage qualifying income until mid-2023 (when they file their 2022 taxes).
Overall Core Demand
Overall, due to the impacts of the Coronavirus, short-term core demand for homes will be much lower than it was in 2019.
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.
Foreign Capital
Since British Columbia and Ontario introduced foreign home buyer taxes, foreign capital flowing into Montreal properties has grown dramatically.
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
Rental investments are a significant driver of home prices. 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 for 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.
As well, recent reports of rents falling across Canada will discourage new rental investment until rental rates stabilize.
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. Then they will try to pick up some bargains.
Dark Money
Dark money is the proceeds of crime or money that are 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.
$5 billion in illicit cash was laundered through real estate in 2018, and approximately three percent of straw buyers were students, homemakers or unemployed. An eye-opening report by Royal LePage says that Canadian residents on student visas buy 1 out of 10 homes in B.C. It would appear that the parents of students are using their children to evade the Foreign Buyer Tax. The beneficial ownership registry may reduce the number of student purchasers if their parents, who are foreign residents, are identified as the ultimate beneficial owners.
We see no evidence of a diminished role for dark money in local real estate.
Overall Non-core Demand
The net effect of all the recent changes will reduce inflows of capital toward residential real estate for non-core uses, and this will put downward pressure on Montreal home 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.’
Tenants' rights advocates are calling on Quebec to put a cap on rent increases. The government has not changed anything yet, but if this were to happen, it would reduce investment in renovating and building new rental buildings.
The City Of Montréal has begun consultations on a bylaw that would mandate 20-20-20 On Social, Affordable And Family Housing that will come into force in January 2021. This bylaw may encourage developers to expedite city building and development approvals in 2020, and that may bring some development forward that would have otherwise occurred in 2021 or 2022. If this happens, it will bring more pre-sales to the Montreal market in 2020, and that will have a place firm downward pressure on apartment prices.
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 beneficiary of the trust is a resident of Canada. Already, most experts can spot some loopholes in this set-up, but the government is trying.
Up until recently, the desired effect of the municipal and federal policies is to reduce unnecessary demand until more supply can come to the market. The federal government is contemplating foreign ownership taxes, the provincial government is beginning to measure international buyer influence in the market accurately, and the city government is focused on trying to make developers build social and affordable supply. The city’s approach raises the costs of construction and reduces the profit of building homes and may inadvertently reduce the amount of housing supply.
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: 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 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
Montreal home purchases have collapsed while the number of homes for sale has not dropped significantly.
The net effect is that the balance between purchases and listings is trending toward a balanced market.
There should be fewer bidding wars and no-subject offers as seller will, once again, need to compete against each other. If the market should tip further toward a buyer’s advantage, sellers may begin to provide discounts and incentives. 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 now play a greater role in negotiations.
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 13,000 homes to the market in the next six months.
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.
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 streteched 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.”
Job losses from Coronavirus containment will worsen this situation. Although the CMHC can help Canadians via Canadian lenders offers 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.
Baby Boomers Downsizing?
In 2020, 45% of baby boomers will be aged 65 and over and, according to a recent survey, 27 percent of Quebec Boomers plan to move into a smaller home as they near or enter their golden years. 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.”
We prefer the term '‘right-sizing’ to ‘downsizing’ 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 and building completions. Most of the homes under construction 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, are purchases of brand-new homes from developers. We have no direct data for Montreal pre-sales, but housing starts are an excellent lagging indicator that pre-sales are continuing just as strong as prior years. The strong construction starts in Montreal imply that pre-sales are continuing at a brisk pace. As well, the proposed new City of Montreal 20-20-20 policy will create an incentive for any developer who is holding land to rush their approvals forward..
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.
If cases in Quebec begin to rise again then we can expect sentiment to worsen. In the short-term we expect buyers will hold back while many sellers will move forward.
The Nanos Canadian Confidence Index has showed a noticeable drop in confidence. “Consumer confidence among Canadians remains net negative but continues to be on the rise.’ It is still well below the low that was reached during the 2008 Financial Crisis.
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.
Planning to Sell? Check our our Complete Home Seller’s Guide.
4. Is this a good time to buy?
With accelerating prices, some homebuyers that took a cautious wait-and-see approach in 2019 got priced out of the market. Prices are trending upward, but Coronavirus containment efforts will muzzle the market. 2020 used to appear to be a favourable time to buy, but now it looks like prices may 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; however, 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.
Planning to Buy? Check our 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:
Four in 10 (44%) Ontarians’ Work Situation Affected By Pandemic (MNP, Jun 22)
High unemployment, lower immigration to restrain Canada housing market (Reuters, June 24)
Toronto Real Estate | Growing Population and Low Inventory Persist (RE/MAX, June 17)
Home price declines will likely depend on unemployment rate: Former CMHC chair (Bloomberg, Jun 8)
Five-year fixed mortgage rate in Canada falls to 1.99% for first time (Financial Post, Jun 8)
CMHC draws fire for tightening mortgage rules (Bloomberg, Jun 4)
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