Canada’s Housing Market: A Comprehensive Outlook for 2020 and Beyond

The Canadian housing market in 2019 was largely characterized by a significant “rebound,” marking a welcome recovery from the slower activity observed throughout 2017 and 2018. Major urban centers across the nation witnessed sustained improvements in both sales volumes and price growth, particularly in the latter half of the year. As we step into 2020, the stage appears meticulously set for this upward trajectory to continue, promising an evolving landscape for prospective buyers, motivated sellers, and mortgage borrowers alike. Understanding the nuances of this market requires a closer look at the key forecasts and underlying economic factors at play for the coming year.

The Resurgence of Canada’s Housing Market: A Look Back at 2019 and Ahead to 2020

Following a period of market cooling, largely influenced by new mortgage regulations and rising interest rates, 2019 brought renewed optimism. Many regions, especially the Greater Toronto Area (GTA) and Vancouver, began to shake off the slump that had gripped activity. This revitalization wasn’t uniform but rather a gradual build-up, demonstrating resilience within the market. The consistent growth observed towards the end of 2019 laid a robust foundation, indicating a fundamental strength and adaptability within Canada’s real estate sector. This sets a positive tone for 2020, with experts anticipating a continuation of these growth trends, albeit with regional variations and potential challenges still on the horizon.

Overcoming the Mortgage Stress Test: A Key Driver of Recovery

The Impact of the B20 Stress Test on Affordability

There’s little doubt that the federal mortgage stress test, formally known as Guideline B-20, implemented by Canada’s banking regulator (OSFI) in January 2018, delivered a considerable blow to housing markets nationwide. This stringent measure mandates that all insured mortgage borrowers must qualify for financing at the Bank of Canada’s five-year benchmark rate – currently set at 5.19 per cent – or their contract rate plus two per cent, whichever is higher. For uninsured borrowers, the same principle applies, using either the benchmark rate or their contracted rate plus two percent. The intention behind this policy was to reduce household debt and mitigate risks associated with rising interest rates, thereby promoting financial stability within the Canadian economy.

The immediate consequence of this policy was a notable reduction in borrowing power for many Canadians. A significant number of prospective buyers, who might have qualified for a mortgage under previous rules, found themselves unable to secure A-level home financing. This forced them into difficult choices: either scale down their home purchase ambitions, explore less conventional and often more expensive alternative lending options, or postpone their homeownership plans indefinitely. The Canada Mortgage and Housing Corporation (CMHC) reported that in 2018, the stress test contributed to new mortgage lending experiencing its slowest rate of growth in 25 years, a pace not seen since the global financial crisis of 2008.

Adaptation and Renewed Momentum in 2019

Despite these initial hurdles, the Canadian housing market demonstrated remarkable adaptability. Throughout 2019, home buyers gradually found ways to navigate and overcome the adverse effects of the stress test. This adaptation, combined with a period of historically low mortgage rates, proved to be a powerful catalyst for recovery. The cumulative effect was a sustained improvement in sales activity, particularly evident in high-demand areas like the Greater Toronto and Vancouver regions, and increasingly in a number of robust secondary markets across the country. Buyers became more accustomed to the new qualification criteria, and lenders adjusted their strategies, allowing for a more fluid market environment.

National Forecasts: Sales and Price Growth on the Horizon

CREA’s Optimistic Projections for Transactions and Prices

Both leading national housing authorities, the Canadian Real Estate Association (CREA) and the CMHC, are forecasting a period of steady sales and price growth throughout 2020. CREA, for instance, has painted an optimistic picture, predicting a total of 530,000 transactions across the country this year. This represents a significant annual increase of 8.9 per cent, signaling strong buyer confidence and market activity. Concurrently, the national average home price is projected to climb by 6.2 per cent, reaching an impressive $531,000. These figures underscore a belief that the market has not only absorbed the impact of the stress test but is now poised for substantial growth, driven by fundamental economic strengths.

CMHC’s Outlook: Full Recovery and Supportive Conditions

Echoing CREA’s positive sentiment, the CMHC anticipates that sales and prices are firmly on track to “fully recover” from the declines experienced in 2018. Their analysis points to several contributing factors, including improving home buyer incomes, which enhance affordability, and robust population growth contributing to strong job markets across Canada. These demographic and economic tailwinds are expected to provide a consistent foundation for housing demand.

In its most recent Housing Market Outlook, CMHC stated, “Overall, economic and demographic conditions will remain supportive of housing activity over the forecast horizon, halting the declines in starts, sales and average home prices that followed the highs of 2016-2017.” Specifically for 2020, CMHC expects national sales to fall within a range of 480,600 to 497,700 units, signifying a year-over-year uptick of approximately six per cent. The average price is projected to range between $506,200 and $531,000, representing an increase of 5.6 per cent to 6.7 per cent from the previous year. These forecasts suggest a healthy, but perhaps more moderated, growth trajectory compared to the pre-stress test peaks.

The Return of the Seller’s Market: A Closer Look at Supply Dynamics

Shrinking Inventory and Rising Competition

While home sales showed consistent improvement throughout 2019, the same cannot be said for the supply of new listings entering the market. This disparity between rising demand and constrained supply is a critical factor shaping the current market landscape. According to CMHC data, new supply shrank by a notable -2.7 per cent year over year in November, contributing to a tightening of available housing stock. This imbalance resulted in a national sales-to-new-listings ratio (SNLR) of 66.3 per cent, a figure that places the market firmly within “seller’s market” territory. An SNLR above 60% typically indicates conditions that favor sellers, leading to increased competition among buyers and upward pressure on prices.

Further illustrating this point, the total months of inventory – a crucial metric indicating the length of time it would take to completely sell off all available homes for sale at the current rate of sales – currently sits at a remarkably low 4.7 months. This represents its lowest level since 2007, underscoring a significant scarcity of available homes. For buyers, this translates to fewer choices, potentially more aggressive bidding wars, and a faster pace of sales. For sellers, it means quicker sales, often at or above asking price, and greater negotiating leverage.

The Toronto Market: A Case Study in Supply Shortages

The dynamics of a tightening market were particularly pronounced in the Greater Toronto Area (GTA), where concerns regarding a growing supply-and-demand gap have intensified over the past year. End-of-year figures from the Toronto Real Estate Board (TREB) revealed an SNLR for the region of 81 per cent. This exceptionally high ratio indicates that just under 20 per cent of all new listings brought to market were left unsold, a clear sign of intense buyer demand outstripping available supply. The GTA’s robust economic growth, coupled with significant immigration, continues to fuel housing demand, making the supply shortage an even more pressing issue.

Jason Mercer, TREB’s chief market analyst, commented on this trend: “Strong population growth in the GTA coupled with declining negotiated mortgage rates resulted in sales accounting for a greater share of listings in November and throughout the second half of 2019. Increased competition between buyers has resulted in an acceleration in price growth. Expect the rate of price growth to increase further if we see no relief on the listings supply front.” This statement highlights the precarious balance of the Toronto market, where sustained demand without a corresponding increase in supply is almost guaranteed to lead to continued, perhaps even accelerated, price appreciation.

Mortgage Rates Remain Favorable: A Boost for Buyers

Bank of Canada’s Steady Hand on Interest Rates

One of the most significant silver linings for home buyers entering 2020 is the expectation of a relatively inexpensive cost of borrowing. It is widely considered highly unlikely that the Bank of Canada (BoC) will introduce a rate hike anytime soon. The national bank maintained its trend-setting Overnight Lending Rate at a steady 1.75 per cent throughout the entirety of 2019. This stability allowed consumer lenders to keep their variable mortgage rates competitively priced, offering attractive options for borrowers. Furthermore, the sustained low rate environment contributed to low yields in the bond market, which directly impacts the pricing of fixed-rate mortgages, keeping them affordable.

A Cautious Approach Amidst Global Uncertainty

The BoC has provided strong indications that it plans to hold the status quo for interest rates throughout 2020, barring any unforeseen and significant economic upset. Should such an upset occur, analysts suggest that a rate cut would be more likely than a hike, providing further insulation for borrowers. The bank’s overall strategy is to maintain the same cautious stance it adopted in 2019. Economic factors both domestically and internationally are not currently strong enough to warrant higher interest rates, yet they are stable enough to prevent the necessity of an immediate rate cut. This strategic approach also provides the BoC with crucial “wiggle room” should global trade tensions or recession risks materialize, allowing them to act decisively if economic conditions deteriorate.

This careful approach is heavily influenced by geopolitical factors. Persistent tension over U.S.-China trade relations continues to cast a shadow of uncertainty over global economic growth. Additionally, growing unease and geopolitical instability in the Middle East, in particular, will continue to inform the BoC’s measured and watchful approach to monetary policy. These external pressures reinforce the bank’s inclination to maintain a stable, predictable interest rate environment at home.

Potential Reforms to the Mortgage Stress Test: A Glimmer of Hope

A Call for a More “Dynamic” Test

Further good news may be on the horizon for those prospective home buyers who continue to find their affordability significantly hampered by the existing mortgage stress test. In a direct mandate issued to the federal Department of Finance, the Prime Minister’s Office has explicitly implored the finance minister to explore avenues for making the stress test more “dynamic.” This directive signals a willingness to re-evaluate the rigid application of the rule, potentially making it more responsive to current market conditions and individual borrower profiles.

While the exact form these potential changes could take remains a subject of considerable speculation, several possibilities are being actively discussed. One significant change could involve a reduction in the current higher-interest qualification hurdle, making it easier for more Canadians to qualify for their desired mortgage. Another proposed adjustment is to tailor the stress test criteria for borrowers with excellent credit histories, acknowledging their lower risk profile. Such a move would reward financial prudence and potentially unlock homeownership for a segment of the population that is currently unfairly penalized by a one-size-fits-all approach.

Addressing Industry Concerns and Fostering Competitiveness

Perhaps one of the most widely criticized aspects of the current stress test regime is the requirement for borrowers to be re-stress tested when switching lenders, even if they are simply renewing an existing mortgage. This measure has drawn heavy and persistent criticism from across the mortgage industry, which argues that it discourages consumer empowerment and stifles competitiveness among lenders. The inability to easily switch lenders without undergoing a new, stringent stress test effectively traps borrowers with their current financial institution, limiting their ability to shop for better rates or terms. Removing this re-stress test requirement for switching lenders would foster a more competitive lending environment, benefiting consumers through better product offerings and more attractive rates.

Conclusion: Navigating the New Decade’s Housing Landscape

As Canada embarks on the first year of a new decade, 2020 is undeniably shaping up to be a busy and transformative year for the real estate industry. The convergence of a recovering market, sustained demand, tight supply, and favorable borrowing conditions paints a complex yet largely optimistic picture. The potential for a more flexible mortgage stress test adds another layer of intrigue, hinting at policy adjustments that could further stimulate activity and improve affordability for many. It will be profoundly interesting to observe how growth manifests within Canada’s major markets and how both buyers and sellers adapt to these evolving conditions. Understanding these intertwined forces will be key to successfully navigating the opportunities and challenges that lie ahead in the Canadian housing landscape.