Canadian real estate market outlook 2015

Sooner or later mortgage rates will rise and house prices will start to moderate. Why this is the year the market will finally start to turn

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From the January 2015 issue of the magazine.

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real estate outlookBuy a house. Don’t buy a house. Soft landing. Crash landing. As we start the new year, the question on everyone’s mind is: What can we expect from Canada’s housing market?

Once again, experts agree that housing affordability is stretched, historically low interest rates will rise, and housing prices will drop. Rewind 365 days and you could be reading a forecast for 2014. But this time the experts agree: prices really will fall and it’s got everything to do with the recovery of the global economy.

Now, if the global economy were a ballgame we wouldn’t be in the World Series. Oil prices are depressed and Europe is still struggling with its credit crunch. But things are slowly improving in the U.S. and within Canada, and the important teams are still in the game: our employment rate is stable, oil prices are not (yet) low enough to cause real concern, and exports have picked up as the value of our dollar has dropped. All this leads most economists to believe we’ll see slightly higher bond and mortgage rates and a nation-wide cooling of the housing market over the next couple of years.

Robert Hogue, senior economist with RBC Bank, says he believes the coming year will be “a moderating phase for the market with a soft landing in 2016.” Hogue predicts national home prices will actually rise 1% or maybe 1.5% in 2015, as buyers race to get in the market before mortgage rates increase, after which prices will fall later in the year. “It’s one of the reasons why 2014 was such a strong year.”

But he cautions home owners: “Canada’s real estate market really is a multi-headed beast. It’s essentially very strong in Toronto, Vancouver and Calgary, but it’s balanced or soft in the majority of other markets.” As such, he predicts we’ll see a cooling of the three biggest markets by the end of the year in response to small mortgage rate hikes starting mid-year.

READ: Protect yourself in an uncertain real estate market »

Now, if the prime rate were to climb from its current 3% level to 5% or 6% over the next year or two, many Canadians could find themselves in deep trouble, says Hogue. But he isn’t sure we’ll see rates shooting up that fast any time soon. Until recently, analysts and policy makers considered 5% to be the neutral or natural interest rate. It was the rate that allowed full employment, a stable inflation rate, and a sustainable growing economy. But Hogue, along with economists from Morgan Stanley and analysts from the C.D. Howe Institute, believe that the “new neutral rate” has actually dropped.

The primary reason is the impact baby boomers continue to have on the national economy. As boomers continue to age and leave the workforce, Canada can expect a slowing of the labour market, which will depress productivity growth, limit the economy, and suppress potential inflation, explains Hogue. “If the new normal is markedly below what we’re used to, then we won’t see as much downward pressure on housing prices,” he says.

The impact of demographics doesn’t stop there. According to a new report by Benjamin Tal, deputy chief economist with CIBC, analysts have been seriously underestimating the number of new immigrants in Canada. New immigrants account for 70% of the country’s population growth and about half are between the ages of 25 and 44—the key demographic that leads to household formations. According to Tal the under-estimated increase in the number of home-buying immigrants in Canada will help to offset a slowing economy, created by the boomer generation. “Immigration, itself, won’t be able to change this trajectory, but it will help to offset it,” explains Tal.

      Play: Romana King talks interest rates and prices with 680 News’ Mike Eppel

But David Madani from Capital Economics isn’t convinced. “Every good economist knows that immigration always fluctuates and it’s never prevented a housing cycle in the past.” He’s also not convinced that builders are out of the weeds when it comes to supply and demand. While he agrees that absorption rates are close to historical long-term averages, he’s confident that the market will suffer. “There are too many one-bedroom condo units being built when demand shows a need for family accommodation.”

So what’s a regular home buyer to do? The best advice is prepare for the worst, but if you’re ready to jump in and you can afford it, waiting for prices to fall might not be the best idea. Ted Rechtshaffen, president and CEO at TriDelta Financial, advises against trying to time the market in general. “It’s not about prices or the mortgage rate, it’s whether you can truly afford to own the home.” This means calculating whether or not you could still afford your monthly payments even if mortgage rates increased to 4% or 5% a few years from now. It also means deciding whether or not you can stomach a housing price drop. While many economists are predicting a 10% drop, the correction could be as great as 30% in some Canadian markets.

Of course, your home is more then equity and capital. It’s the place you spend time with friends and family, and the place you build memories. “Life and lifestyle is just as important,” says Rechtshaffen, so as long as you can afford your payments, “don’t be too concerned about the correction.”


18 comments on “Canadian real estate market outlook 2015

  1. “Hogue predicts national home prices will actually rise 1% or maybe 1.5% in 2015, as buyers race to get in the market before mortgage rates increase”

    So he’s basically saying that Canadians have currently been going 3/4 retard, but this year they will go “FULL RETARD”… Great strategy for Canadians. Buy High -> Foreclose Low.


    • Hi George: I would absolutely agree with your sentiment (perhaps not your terminology) if I were writing just to real estate investors. However, there are a multitude of reasons why Canadians need to buy or sell in this current market—you can go to the following blog post for a sample of those reasons:
      My aim at MoneySense is to provide our readers with the knowledge required to make the best possible decision. I don’t think Robert Hogue, or I, am suggesting people by high and sell low. In fact, I am consistently trying to remind people that real estate is a long term investment and this applies regardless if you’re buying a home or an investment property. I also try and remind people that buying a home without taking into consideration possible price corrections (and how that will impact your equity) is a foolish approach to home buying. Indeed, this morning’s blog post once again addresses these issues and can be read at Now, if you were in the market for a condo, I have some very specific advice when it comes to buying depending on the city you live in. This post can be read if you go to here:


      • The bottom line is that nobody knows what is going to happen to home prices as interest rates rise or as oil continues to plummet. Any model you create here isn’t necessarily going to based on assumptions that will hold through 2016. Bubbles are only bubbles in hindsight after an external factor causes prices to drop a long way in a short time.

        What I think many of these analyses are forgetting is that their predictions for a price decline over 2015 through to 2016 is in itself a potential factor that could burst a housing bubble. If this narrative is spread across Canada and becomes entrenched into the collective psyches of potential buyers, people will delay their home purchases on a grand scale leading to an imbalance between supply and demand and these absorption rate ratios will begin to look very ugly. Negative sentiment can build on itself and the outlook can begin to look even scarier with an increasing number of foreclosed properties entering the market. Home values tend to take the stairs up, but they take the elevator down. You can pore through as much data as you wish, just don’t make the mistake of assuming that it will tell you anything about how a population of glorified apes will deal with the threat of a price correction!


        • “The bottom line is that nobody knows what is going to happen to home prices as interest rates rise”

          Uh, no. You can find the answer in mathematics provided you decide to look into what Math says.

          Assume interest rates is 4%. Assume after all other obligations, you can afford about 980$ in monthly payments. With this payment, @ 4% you can buy a home which is worth about 200,000 $ at current market rates. Now central banks raises rates to 6%. At 6% what does 980$ per month buy you ? It is a home worth about 170,000 $ . Price has to decline. Value of a home has deviated from price in current environments.

          Central bankers can not change compound interest & exponential laws that govern an individual’s life. It is what it is.


          • Hi Math Rules,

            I love math, but I also understand economics. Math will calculate the impact on mortgage payments, math will not tell you how it will influence the supply/demand dynamics of real estate across the country coupled with consumer sentiment-these are the factors that dictate the selling price of a home. Mortgage payments will have an influence on this, but the relationship is not going to be linear, and surprisingly, there have even been inverse correlations between interest rate increases and house prices.

            High school math without studying the context isn’t a very good combination, sorry.

        • Rob: Yes. Consumer sentiment really does have an impact on the real estate market. It was consumer sentiment that prompted better-than-expected sales and prices in 2014 and consumer sentiment is once again predicted to push prices up (even just a little) in 2015. This, despite ALL the evidence that the market is going to correct. So, thank you. Your point is spot on. Consumer sentiment is a strong influence on the market. However, I’m not sure that consumer sentiment, alone, can cause a nation-wide real estate market crash–not unless we’re have an Argentina-type situation where we all lose faith in not just the real estate market but in our economy as a whole. For that reason, I’m not convinced that consumer’s will cause a crash or correction. Delay it, absolutely, but not cause it. Still, your comments certainly give me food for thought. Thank you!


    • Ha ha, George. Comment of the year. Love it. So true.


    • Haha spot on George! It’s what the banks, gov and the nanny state want citizens to be, as stupid as possible while stealing their life savings behind their backs! What better way to do that than to speculate & liquefy the very necessity every human being needs…housing, tax money still feeds the gov/bank coffers + 6 figure salaries, they couldn’t give a damn about you and me.


      • Spot on Lemon.


    • @ Joe… look at your source… be careflul not to step in the colossal piles of bias when doing you DD!


    • Joe: It certainly can be frustrating. In the Outlook, I actually wanted to provide context to the type of articles you’re talking about: reports that housing prices will actually appreciate this year, albeit moderately. The analysts I spoke to still believe this is the case–even with sinking oil prices. That’s because the real estate sales cycle takes time to respond. Put another way: buyers and sellers take time to respond, en masse, to the changes in the environment. As a seller, I won’t lower my home price until my house has sat on the market for a while. Get enough sellers doing that and you have a lag between the economic event—job layoffs due to dropping oil prices—and house prices dropping. Of course, oil prices and jobs are one thing and mortgage rates are another. The big reason why prices are set to appreciate this year is because of buyer sentiment to rush into the market before rates rise. It’s not an unknown phenomenon and it’s what gave the real estate market momentum in 2014. So, short answer: housing prices are expected to rise in 2015, but moderately. BUT there’s going to be a correction in housing prices. As part of the Joe/Jane Home Buying Public, we probably won’t see this until 2016, but economists are convinced it will happen and so am I. Hope that helps.


  2. I live in Edmonton and I must say the slump in oil prices has quite a few people worried. Edmonton (and Alberta in general) is heavily dependent on the oil and gas industries – a one trick pony you might say. I’ve seen anecdotal examples of people making really big money (family income >$250K) yet they are spending it almost as fast as they can make it, and living in homes that 20 years ago were reserved for perhaps the most wealthiest 1% of society. Does a young couple starting a family need a $750K house? $1.3M? I think many young Canadians have far too much debt tolerance. When I bought my first house, the lady at the bank made faces at me and my (then) wife because we didn’t buy “all the house we could afford”. I didn’t want the biggest home the bank would give me – they based it on gross income alone, and when I did the math, I would have been severely house poor. Thank goodness because now I am divorced but I still manage to make the bills each month, despite niceties like travel and fancy dinners and entertainment are, for the meantime, going to be put aside. People also laugh because I worry about being a few thousand in debt. $100K. $150K. $250K… “Oh that’s common now. That’s nothing” says another lady at the bank. Somewhere, something has to give. Alberta may have oil resources that have often come to the rescue, but I just can’t wrap my head around the level of risk/debt tolerance and “movie star lifestyle”. Yes, $200K family income might seem like “rags to riches” for some young couples from elsewhere in Canada, but back home they didn’t have a $750K house, two $100K vehicles and they didn’t eat out every night. Some of the poorest people I know work for oil and gas and have expensive homes – and have such massive debt I myself would not be able to sleep at night. If the price of oil does not recover soon, there could be a big sale on homes in Edmonton. That my 2 cents.


  3. Last week mortgage backed securities sold off, and mortgage rates were up on the week. The low point came the first week of February, low rates have stoked the latest round of a series of refinance booms in recent years as homeowners seek to lock in cheap long-term funds. The rate has since risen to 4% for the no-cost mortgages but borrowers who pay all third-party charges plus a point — 1% of the loan amount — can still get a 30-year fixed loan at 3.625%.


  4. It all comes down to one word: Confidence!
    Once confidence is lost, you can kiss your home goodby. I read from one of the comments that “home values go up the stairs and come down on the elevator.” Well, that is true in any market. I think what we’re seeing right now is that typical buubg climax (or selling climax, if you’re on the pros side) where everyone is frantically rushing in as to not miss this last “excellent” opportunity before the market goes to the moon.
    Sadly to many, there is only one way from here, and it is neither up nor sideways… you figure it out yourselves.


  5. Well, sadly the outlook is grim in Toronto – making it impossible for families to get started. My husband and I are actually in the planning stages to leave Canada in search of a more affordable higher quality of life so that we are able to have a family. His job is very specific – making it difficult to find the balance in Canada — since all jobs center around 5 main hubs, making this design not conducive to affordable lifestyles. (Houses 1 hour outside the city are also not affordable, not to mention the quality of life is low if you spend 10hours + in a car per week just commuting. Or 4 hours a day on a commuter train ( which works out to be 20hours a week, in some circles you could call that a part time job). That isn’t living. That is just slavery under the guise of life. Peace out Canada!


  6. You still think so?


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