Canadians shopping for homes should make sure they really want that home — especially in cottage country. BMO senior economist Robert Kavcic sees the market cresting soon. In a research note to clients, he sees a few upbeat economic indicators, which may dump cold water on stimmy. People may debate whether or not big cities are in bubbles, but the bank sees cottage country as one for sure.
Canadian Real Estate Markets May Crest Soon
The bank is warning markets may “crest,” or peak, in the not-so-distant future. Home prices have been driven by low interest rates and a lack of supply, relative to demand. Low rates have fueled higher home prices, as those not impacted by the pandemic went on a borrowing spree. As for inventory, pent-up listings have been waiting for a more ideal time than a pandemic to sell. Both of those trends are coming to an end in the not-so-distant future.
Kavcic said, “Indeed the factors that have propelled this market to dizzying heights might be ready to crest soon.” He cites vaccination deployment, and rising home inventories as two big reasons the market may top. He also notes the BoC’s shift of narrative, from low rates forever, to they can rise soon.
If You’re Buying Right Now, Be Prepared To Ride Out Negative Equity
He acknowledges housing may be debatable as a bubble, but it’s harder to argue cottage country isn’t. “While the recreational property market is certainly unique, valuations have never been this high when adjusted for interest rates and provincial income.”
He can “appreciate” incomes don’t matter to many high-end properties. However, the historic case for valuations is completely out of whack. The percent of income a median household needs to carry a mortgage in Ontario’s cottage country has never been higher. It breached the 50% ratio recently, hitting levels not seen since the early 90s bubble. The market stagnated for over a decade after that pinprick.
Work-From-Home May Dampen The Impact, But Not Enough
The work-from-home trend may help to preserve some of the markets, but Kavcic still sees a lot of risks. “Even if we build in some permanence because of things like work-from-home and scarcity of waterfront, it’s still not hard to see a scenario where froth comes out and the last buyers in (especially in a blind-bid scenario) are faced with years of negative equity.”
In other words, today’s buyers should really like the property if they are worried about a downturn. They’ll be carrying it for a while, or may have to top up equity to sell. It may not be a concern for price-insensitive or long-term users. However, those that thought they may just be dabbling in work-from-home, may be stuck a little longer than they want if they change their mind.
Consumer behavior has changed, and more buyers are looking for small-town properties. In fact, more buyers are looking to move to small towns than Canada’s big cities. However, the prices paid have become a little disconnected, even if it’s more affordable than big city living.
Kavcic is specifically discussing cottage country in his note, but he has previously mentioned this is turning into a national issue. The cresting factors are also macro indicators, so the impact isn’t confined to just one region. Right across Canada, easy credit has pushed markets to make frothy gains. As the economy improves, credit slack will tighten. As that shrinks, the frothiest of markets are likely to feel an adjustment.
Like this post? Like us on Facebook for the next one in your feed.