In recent months, there have been a number of news articles discussing a “soft landing” for the Canadian real estate market. For those who look beyond the monthly year-over-year percentage changes, however, it is apparent that the soft landing has been unfolding for quite some time.
The precise definition of a soft landing is something that may be quibbled over but in broad terms can be described as having three key characteristics: a decreased and sustainable level of demand following a period of rapid growth, demand and supply remain in balance, and stable prices following a period of rapid appreciation.
When looking at monthly year-over-year comparisons, it can be difficult to see how the last few years could be characterized as a soft landing. The transitory effects of the financial crisis and successive rounds of mortgage regulation tightening caused significant volatility in the housing market as buyers changed the timing of their purchases in response to a changing economic and regulatory environment.
Taking a step back and looking beyond monthly sales volatility provides a broader perspective. Considering annual sales figures, it becomes apparent that between 2000 and 2007 there was a substantial increase in the level of demand. By contrast, the period from 2008 onward has seen sales stabilize at levels slightly below the 10-year average.
Over the past five years, annual sales activity has been remarkably stable, with demand supported by a low interest rate environment. At the same time, the Department of Finance has repeatedly taken action to prevent excessive exuberance while maintaining sustainable activity.
With demand being held in check and supply having responded accordingly, the resale housing market as a whole has stayed in balanced market territory over the past five years.
Price gains have slowed markedly since 2007 in response to a balanced market. From 2000 through 2007, prices climbed rapidly, driven by tight supply conditions and strong demand. Since then, price gains have been much slower and are forecast to moderate further over the coming years.
With price gains continuing to slow, stronger income growth will lead to improving affordability despite modest interest rate increases currently expected to begin in late 2014.