Homeowners should brace up for a storm in the Real Estate market

What the Liberal or Conservatives win will mean for the Canadian housing market

The sizzling Canadian housing market is set for some more turbulence if either the Liberals, NDP or the Conservatives win the September 20 elections. All the political parties are making threats and promises that will shake up the market for both buyers and sellers.

Prime Minister Justin Trudeau in a surprise policy move has just joined Conservative leader O’ Toole in announcing a 2-year ban on foreign buyers if he is re-elected. The Liberal government has pledged to ban foreigners from buying Canadian homes and make the bidding house purchases process more transparent to curb the bidding wars.

Trudeau also promised to build more homes and help renters become owners with a rent-to-own scheme, a down payment savings program, and bigger tax credits. In addition, an anti-flipping tax would be introduced on residential properties sold within 12 months of purchase.

Trudeau’s main rival, Conservative leader Erin O’Toole, was the first to pledge to build a million homes over three years, change the mortgage stress test and ban non-resident foreigners from buying Canadian properties for at least two years. The party wants to release 15% of federally owned buildings into the housing market, explore converting office space to housing and allow developers to defer capital gains taxes if they reinvest in rental properties.

NDP also holds a blistering position on the Canadian housing market. NDP Leader Jagmeet Singh said he will slap a 20% tax on home purchases by those who are neither Canadians nor permanent residents. NDP is also pledging to build an additional 500,000 homes.

How the next Government will affect the Canadian real estate market

Will rents and house prices come down or keep going up? This is the biggest question that prospective buyers, immigrants as well as homeowners will be asking. Here are 5 ways the new policies could affect the Canadian real estate market:

  1. Price drop…short term

Canadian home prices have jumped 15.6% in the last year and the Canadian Real Estate Association’s home price index is up 69.7% since November 2015. The good news for renters and homebuyers is that the new policies will cool the market temporarily and most probably bring prices down. The increase in aggregate supply will dampen rising prices. The ban and higher taxes on foreign buyers will also cool the demand, further increasing supply.

Savvy investors and immigrant entrepreneurs should stand by and watch out for bargain prices in 2022 if these policies are implemented. People that bought at exorbitant prices in 2020 and 2021 will find themselves holding on to suddenly over-priced inventory.

  1. Prices up… long term

What the Liberal or Conservatives win will mean for the Canadian housing market

However, this good news and the lower price trend in the Canadian housing market is not likely to last for too long. Investors always find ways to work around these rules. For example, a foreign speculator can get around the ban by pretending they plan to move to Canada at some point in the future, without providing any details or timelines.

Furthermore, foreign buyers represent only a small share of homeowners in Canada. Temporary ban and taxes on them will at best have only a limited impact on the housing market.

Historically in most developed housing markets, when prices drop due to a policy shift or severe market forces, the market makes the necessary adjustments. Seasoned investors hold on to their inventory and within a period, usually between 1-2 years, the prices climb up again. It is not likely to be different this time around.

  1. Stricter mortgage rules

Banks will further tighten the mortgage rules and make it more difficult for first-time home buyers and current homeowners planning to renegotiate their mortgages or refinance. This will in turn put more pressure on the housing market in the short and medium-term.

  1. Demand will remain strong

In Canada, housing supply has simply not been able to respond to demand as it should owing in large part to rules and regulations governing new construction in Canadian provinces and cities. Builders are not able to respond as effectively to price signals as should be the case.

The underlying factor supporting rising prices is a chronic insufficiency of supply relative to demand. There are fewer housing units per thousand Canadians now than there were three years ago. Historically low-interest rates obviously contributed to rising demand.

  1. Immigration factor

Immigration is another big factor in the whole equation. With the projection of over 400,000 new immigrants to Canada, and with over 60% of them likely to settle in “the big 3” (Toronto, Vancouver, and Montreal), demand for housing will remain bullish for many years to come. The underlying supply insufficiency is so large that prices will continue to reflect this imbalance.

Which party will you vote for as a homeowner or prospective buyer?

With the housing market, while one side jubilates, the other side mourns. Homebuyers and renters beat the drums when prices drop.

On the other hand, for landlords and real estate investors, their blood pressure goes in the opposite direction when house prices go down. This is the most fascinating paradox of the housing market.



The Star

Scotia Bank

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