CREA predicts a $1Bil hit to the economy next year as home sales are expected to fall in 2018

Canadian Real Estate Association (CREA) released new numbers this Thursday indicating that home sales will drop by 27,000 units or 5.3% in 2018. Although ~5% may not seem like a lot, it will be compounded on top of the expected 4% sales drop in 2017, which adds up to a mighty 10% drop in sales between 2017 and 2018.

In contrast to the optimistic reports by Royal Lepage and RE/MAX, which each predicted a 4.9% and 2.5% surge in prices in 2018, respectively, CREA predicts that home prices across the province of Ontario will decline by 2.2%. This speaks volumes about where price and demand is in the market and where prices might end up in 2018.

Why does CREA think prices will drop in 2018:

  • Sale of higher-end homes, which tend to increase the average sale price, will dwindle, decreasing the average price of homes, which often tend to have an outsized impact on the average.
The effect of outliers on the mean (average) can is huge. Consider a reduction in 10 x 10Mil. homes in Toronto. (Source: http://www.alamandamaths.com/statistics-and-probability/data-representation-and-interpretation/outliers/)

How does this impact the economy in 2018:

  • 27,000 fewer sold units translates to a reduction of $1.1-billion in economic activity and 12,000 fewer jobs (according to the Altus Group)

What about the recent surge in transactions in recent months? Doesn’t that mean that the market is recovering?

  • It is important for those in the market and prospective buyers to understand that although seasonally adjusted sales are up 16% from October to November, this is most likely due to buyers trying to secure a deal so that they can avoid the more stringent financing rules that will be introduced in 2018.
  • We don’t want to gloss over the fact that on a national basis, seasonally adjusted home prices have climbed for the 4th straight month, which could be interpreted as positive upwards momentum, but we believe this is still largely due to the new financing rules that will be introduced on January 1st, 2018. If this is indeed true, we should see a drop in sales in early 2018 as those
  • New mortgage rules were introduced in October, so why did prices surge in August and September? This is something that we will explore in future articles.

What are other economists/experts saying?

  • “Bank of Montreal economist Robert Kavcic argues the mortgage-rule changes and interest-rate increases will keep Toronto’s market growth at a more reasonable pace in 2018”
  • “Bank of Nova Scotia economist Adrienne Warren predicts national price trends “should remain positive, if subdued” next year, with more than half of local markets in Canada “in balanced territory” for the year.”

That’s it for New Year’s Eve -1. If you have any comments, we would like to hear from you! Happy new year to all my readers!

Sources:

The Globe and Mail.

Hadi is Honours civil of engineering graduate with solid project management experience in the construction industry. Solutions-focused, results-oriented with strong business acumen and entrepreneurial spirit. Currently, he is working as an assistant site-superintendant with Darcon Inc. at one of Vaughan's biggest developments, Centro Square.

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