Langstaff Gateway Condos by Kylemore.Factors that affect the Canadian housing market and house prices. Like many commodities, house prices are affected by the economy of supply and demand.Please Visit: Langstaff Gateway Condos by Kylemore to Get Your VVIP Registration Today!
When supply falls short of demand, house prices rise, and vice versa. The difference is that the impact of supply and demand in the housing market on house prices is not as simple as it seems. The strength of housing demand and the amount of supply will affect house prices. The following is a detailed analysis.
Five factors affecting demand.
One is the interest rate. Interest rate is a key factor affecting housing demand. All other things being equal, the lower the interest rate, the higher the demand for housing. The lower the interest rate, the lower the cost of borrowing, and the more people can afford to borrow money, the more they can afford to buy a house. And vice versa.
Back in 1970 and 1980s, mortgage rates were in the double digits, about the same as credit card rates today, and it didn’t make much sense to borrow money to buy a house, so many people were reluctant to buy a house at all, leading to a drop in demand. Today, mortgage interest rates are less than 3% and loan costs are ultra-low, leading to a surge in demand for housing across the country.
Second, economic factors. The overall economic and employment situation also determines the demand of the housing market. When the economy and employment are good, demand for housing rises, and vice versa. The reason is very simple: the employment situation is not good, the jobs are gone, and the future jobs are not settled, who will rush to buy a house? When the employment situation is good, the prospects for employers and the economy as a whole are good, and consumers’ confidence in buying houses is also high.
The same applies to the economy as a whole. During an economic recession, although you may not be unemployed for the time being, you may be worried about being laid off at any time, so you naturally have no mood and confidence to buy a house. No one wants to buy a house and lose their job a few days later, resulting in inability to repay the loan.
The third is the bearing capacity of house prices. Housing price affordability is the affordability of local housing prices compared with income. When house prices are too high relative to income, demand for homes falls, and vice versa. Take Toronto as an example, the average household income in Toronto is low, but the house price is the second most expensive in the country and its affordability is poor. The average income in Ottawa is higher than that in Toronto, but the house price is lower and the affordability is higher in Ottawa. Rent affordability also affects demand in the housing market. If renting is cheaper than buying, people may choose to rent rather than buy.
Fourth, the factor of immigration. The more immigrants in a city, the stronger the demand for housing. Foreigners must achieve the required score if they want to obtain permanent residence status or naturalization. This means that more capable immigrants and higher incomes make it easier to buy a house, thus boosting demand in the housing market. Take the Greater Toronto area as an example, many districts attract nearly 100000 immigrants every year, greatly boosting the housing market demand and causing prices to soar.
Similarly, overseas buyers will also affect demand in the housing market. Foreigners buy Canadian real estate for safe investment, although not to live, but it will also boost the housing market demand, leading to a tight market supply. To curb this factor, some provinces have begun to collect overseas buyer taxes, but most of the super-rich will not care about paying this tiny tax, which may not be very effective.
Fifth, the mortgage policy. In recent years, the government has tightened mortgage loans for many times. In the past, it was easy to get a 40-year mortgage, but now the down payment is less than 20%, the maximum mortgage maturity is only 25 years, and the maximum 20% down payment is only 30 years. For people with a good income and cheap housing prices in the city, it is certainly not a problem to buy a house with a loan. But even if the income is good, it may be difficult to get a loan to buy a house in high-priced cities such as Toronto and Vancouver.
Mortgage stress tests implemented at the beginning of last year also damped demand in the housing market. Mortgage stress tests require applicants to be able to repay their loans by adding 2 per cent to the current mortgage rate or at the central bank’s five-year benchmark interest rate (currently as high as 5.19 per cent, whichever is higher). As a result, people’s ability to buy homes has been cut by nearly 20 per cent. Many people can afford to buy a house before the implementation of the new rules, but can no longer afford it after the implementation of the new rules, and have no choice but to wait and see, curbing demand in the housing market.
Four major factors affecting supply.
First, housing, that is, the number of active listings. The more active listing, the more adequate housing supply, the more buyers choose, and vice versa, some communities may sometimes only have 1 or 2 suites for sale, buyers have too few choices. The small number of active listings and strong demand mean the house is more likely to be sold at a high price. With more active listings and less demand, the house may not be sold, or the price may be reduced for sale.
The second is the development of new houses. There are two major types of houses in the housing market, one is existing housing, that is, second-hand housing, and the other is new housing. When there is an imbalance between supply and demand in the housing market, the number of new houses can make up for the shortfall, and there must be enough new houses to be built in order to achieve a balance between supply and demand. If there is a shortage of developable land and the government approval process is cumbersome and lengthy, the pace of new housing development may not keep pace with the growth in demand, leading to a rise in house prices.
The third is the development license. The approval of development license determines the speed of new house development. If the government’s approval process for new housing development is cumbersome, the listing cycle will be longer, housing supply will be tight, and house prices will face upward pressure. If the development approval process is fast and the listing cycle of new houses is short, the supply of housing will be sufficient, and house prices will show a downward trend.
The large number of development licenses issued by the government does not necessarily mean that the number of new housing developments will rise. After the developers get the development licenses, they will have to raise enough funds to continue to promote the project. If house prices fall sharply and interest rates rise, developers may suspend development even if they get permission.
Fourth, land use.
Land use planning is usually decided by the municipal government. Land use planning, divided into residential and commercial planning, clearly defines the population density, building height and property type of the land (such as detached houses, town houses or condos, etc.). If land use planning fails to keep up with the demand for new housing development, it will lead to a shortage of housing supply and push up house prices. For example, everyone wants to buy a separate house with a backyard in an area, but the local land use plan only allows the construction of condominiums, so the supply of local independent houses is tight and prices will naturally rise.
The shortage of land will also lead to a rise in house prices. Take Vancouver as an example. Vancouver has more mountains and less flat land, which means there is less land for housing development. To sum up, there are many factors affecting housing supply and demand, each of which is crucial. The next time we find that the house price in an area is too high, we can analyze it from the above aspects. It is difficult to quantify how much each factor affects the house price, but it is certain that each factor affects the house price more or less.