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Canadians are Nearly 50/50 Split in Housing Market Confidence

24 October 2012

BMO released their first-ever Housing Confidence Report yesterday, and it shows that when it comes to confidence in our housing market, Canadians are split on the issue at about 50/50. We are Canadians though, and we are a wary bunch. That’s shown in the fact that those of us that are confident in the market, only feel that way if things remain exactly the way they are.

According to the survey, 46 per cent of Canadians plan to buy a property in the next five years. This percentage shows that nearly half of us feel pretty good about the housing market; good enough in fact, to jump right into it. This can be seen in the chart below, which shows the national average of those that are planning to buy in the next five years; as well as the percentages found from different regions of the country.

That being said, those currently in the market might not feel the same way, as shown in the 72 per cent of homeowners that said they’d feel a significant pinch if the amount of their mortgage payments went up, such as if interest rates were to go up.

“That fact that 46 per cent of Canadian homeowners intend to buy a property in the next five years implies that Canadians are feeling confident in the current real estate environment,” said Martin Nel, Vice President of Lending and Investments at Bank of Montreal. “However, that certainly is tempered, given that adverse moderate increases in home prices and mortgage costs would have on the average homeowner.”

These numbers may surprise some, given that the new Canada mortgage rules have cooled the market significantly in the past two months; and that’s led many to believe that our housing market will see a downturn in the next year or two. Typically that would lower Canadians’ confidence, but that’s not so. As shown in the chart below, the new rules have only affected 22 per cent of the population’s intent to buy a home within the next five years. We are aware of those price increases though, as they will have 29 per cent of us spending less on a new home.

But again, all of this is dependent on the fact that things remain exactly the way they are right now. But what if those price increases that we’re aware of actually take place? Nationally, the percentage drops from that 46 per cent to 36 per cent in that event, as you can see from the chart below.

The only exception to the general sentiment is the province that’s been the exception to ever rule when it comes to the Canadian housing market lately – that’s Alberta. While the percentage in this province would only drop by 1 per cent should prices increase by 5 per cent; a 10 per cent increase would have 9 per cent of current buyers dropping out of the market.

So we’re aware of those price increases, and in many cases we even know what we’ll do if they do in fact occur. But when that happens, how much will those increases be? And will those percentages, such as the 9 per cent in Alberta, be affected at all? In short, will home prices really increase that much?

It’s hard to say, with some experts saying that home prices are going to rise 25 per cent, others saying they’ll only go as high as 10 to 15 per cent higher than they are now; and some saying that in many markets, prices won’t increase at all. But what would the average Canadian say if you asked them how high they expect prices to increase? The survey did ask people just that, and while the percentages vary from province to province (shown in the chart below) Canadians expect that nationally, prices will increase about 2 per cent over the next year.

But these are just are expectations, not necessarily what will actually happen. But Sal Guatieri, Senior Economist at BMO Capital Markets, disagrees with this expectation.

“Given that Vancouver is one of the priciest markets in the world, it’s not surprising that many people expect some correction,” says Mr. Guatieri.

In fact, he expects that in Canada’s hottest markets, Toronto and Vancouver, prices are expected to see a decline in the next year. That’s an opinion that most experts would agree with.

But what about those that have already bought? The survey also shows that many of these people don’t feel nearly as confident, with 28 per cent (combined totals) of Canadians that are planning on selling their home during the next year. That being said, there’s almost an equal percentage, 21 per cent, that are planning on buying another property, in the terms of an income property.

This lack of confidence could be due to the alarming news that Canadians have hit 163% in our debt to income ratio; and if it goes any higher, it could do a great deal of damage to the housing market.

The Housing Confidence Report also asked Canadians about national debt levels, their own debt levels, and how that would affect their current home ownership, or their plans for such. The results showed that over half of us are cutting back on big or frivolous purchases; and that a small minority of us have had so much trouble making our mortgage payments that we’ve had to use a portion of our savings – eliminating the ability to pay down other debt.

“Rising debt and elevated house prices have increased the vulnerability of a meaningful number of households, and their financial situation will worsen if interest rate increase even moderately,” says Mr. Guatieri.

He says that’s not likely to happen but, as you can see from the chart above, 16 per cent of Canadians would be in serious trouble if they did.

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