Evaluating the Parallels between the 90s and Today: Insights into Canada's Current Real Estate Market

Evaluating the Parallels between the 90s and Today: Insights into Canada's Current Real Estate Market"

As Canada's real estate market experiences rapid shifts in interest rates, comparisons to the housing market of the 1990s are surfacing. The Bank of Canada has escalated interest rates from 1.0 percent in April 2022 to 5.0 percent by July of this year. Drawing parallels, between February 1994 and January 1995, the central bank raised rates from 7.25 percent to 10.5 percent.

Elton Ash, the Executive Vice-President of Re/Max Canada, recalls how the 1990s interest rate hikes immediately impacted the Greater Toronto Area's (GTA) housing market, resulting in softened sales and a decline in average prices from nearly $209,000 to $198,000 by 1996.

Today, we find ourselves in a similar scenario, with the saving grace being the current shortage of inventory for sale. Ash commented on these observations in the Re/Max Hot Pocket Communities Report, published in late August, raising the question of where the real estate market is heading.

However, not everyone shares the belief that the current real estate market is destined to mirror the challenges of the 1990s.

Comparing the 1990s to Today:

Jason Mercer, Chief Market Analyst at the Toronto Regional Real Estate Board, emphasizes the key difference in the current market—the limited inventory in the GTA, a stark contrast to nearly three decades ago. In the 1990s, panic selling was prevalent, whereas today, as interest rates rise, the supply remains constrained. Homeowners are less willing to list their properties amidst higher borrowing costs.

While year-to-date listings in the GTA have declined by about 20 percent, Mercer notes a recent uptick in listings, indicating a shift in the trend. Unlike the 1990s, recent rate hikes haven't led to a rapid drop in sales and an increase in listings. Furthermore, the rapid increase in unemployment in the early to mid-1990s, which negatively impacted consumer confidence, differs significantly from today's scenario.

Today, high immigration rates contribute to robust population growth, supporting both the ownership and rental markets. This surge in immigration is something not seen to the same extent in the 1990s.

Future Predictions:

Francis Gosselin, a Montreal-based consulting economist with online mortgage firm Nesto, concurs with Mercer's analysis. He highlights the considerable supply issue in the GTA and Montreal today, driven by "massive immigration," a significant departure from the 1990s. The federal government's goal of admitting approximately 500,000 immigrants annually is a substantial change in comparison to the '90s.

Housing starts remain far below what's required to accommodate newcomers, primarily due to higher financing costs resulting from interest rate hikes. This has made it challenging for developers to initiate new projects.

Gosselin notes the difficulty in predicting whether recent interest rate hikes will lead to a decline in home prices. He suggests that even if prices dip slightly, it's unlikely to be a prolonged trend.

As of September 6, the Bank of Canada decided to maintain its benchmark interest rate at 5.0 percent, citing concerns about underlying inflationary pressures. While economic growth has slowed compared to earlier in the year, unemployment rates, though higher than earlier in the year, remain relatively low from a historical perspective.

The GTA is projected to conclude the year with approximately 70,000 sales and average prices around $1.12 to $1.13 million. Gosselin anticipates a period of relative stability in both interest rates and house prices. While significant returns in real estate may not be expected, a significant downturn is also unlikely in the near future. The consensus is that the market is entering a new phase of stability.

Michael Simone

Source: The Real Estate Magazin