A newly minted trade agreement between Canada, Mexico and the United States has erased some of the uncertainty hanging over the Canadian economy, but the tentative deal could spell more trouble down the line for the housing market, Capital Economics warns.
Senior Canada economist Stephen Brown says the proposed United States-Mexico-Canada Agreement (USMCA) will help to keep economic growth at a healthy clip for the next couple of quarters.
But he cautions that he believes the Bank of Canada is likely to raise interest rates by more than it otherwise would have.
In addition, bond yields are already rising in light of global financial trends and the announcement of the trade deal. If the recent increases in bond yields are sustained, mortgage rates will probably head higher, too, Mr. Brown points out.
The Bank of Canada will almost certainly lift its key rate in October and another jump is likely in January, in his view.
Rising rates for variable and fixed-term mortgages could be a drag on home sales, Mr. Brown says.
The Toronto Real Estate Board reported that sales in the Greater Toronto Area crept up 1.9 per cent in September compared with the same period last year.
The average price in the same period rose 2.9 per cent to $796,786.
On a national level, the stability in Toronto is offset by declining sales in Vancouver, Mr. Brown points out.
Looking ahead, Mr. Brown predicts the Bank of Canada will reverse course near the end of 2019.
According to his forecasts, growth in Canada’s gross domestic product will come in at a little above 2 per cent this year, then slow to 1.8 per cent in 2019 and just 1.3 per cent in 2020.
The rate hikes over the past year, combined with those on the horizon, will hit household spending harder than the bank expects, Mr. Brown predicts.
Meanwhile, employment gains were strong in September, with rising job numbers in construction, finance, insurance and real estate employment pointing to a fairly positive picture of conditions in the housing market, Mr. Brown says.
For indebted homeowners, the less positive news is that the central bank is all the more likely to increase rates this month.
Looking further at jobs, another buoyant sector is technology.
In July, CBRE Group reported that Toronto added 82,100 technology-related jobs between 2012 and 2017. That pace of growth was faster than San Francisco’s, according to the commercial real estate services and investment firm.
Toronto ranks as North America’s fourth-largest tech-talent market with more than 241,000 tech workers, CBRE says. That figure marks a 51.5-per-cent increase over the past five years, according to the firm.
Anthony Hitt, the New York-based president and chief executive of real estate firm Engel & Voelkers Americas, believes this expansion in tech jobs bodes well for condo development in downtown Toronto.
Among the tech firms in expansion mode are Microsoft Canada, which is planning to move its headquarters to downtown Toronto from Mississauga in 2020, and Intel Corp., which recently announced plans for the creation of a new engineering laboratory to build sophisticated graphics chips in North York, which is in the northern end of Toronto.
Mr. Hitt says the tech industry has a work force made up largely of millennials, who typically prefer city living to the suburbs.
A soon-to-be released Engel & Voelkers study found that – in contrast to their parents – millennials do not view home ownership as a status symbol.
Proximity to work and lifestyle rank higher on the list of priorities of the young people Mr. Hitt dubs “high-earning-not-rich-yet,” or HENRYs.
“People are now looking more at what’s outside their front door than inside,” he said. “Today, status doesn’t even make the top 10.”
Mr. Hitt says young people also have a different attitude toward public transportation than the older generations.
“We value our time more” and the idea of sitting in a car is not appealing.
Still, Mr. Hitt says, some young workers still want green space and those will be the buyers of suburban homes in the future.
According to Mr. Hitt, a majority of millennials surveyed own or want to own a home. Many also may be leaning toward living in a condo in the city and buying a second home in the country or at the lake.
Mr. Hitt notes that technology allows workers to avoid a long commute every day.
“We can be more remote. We don’t have to go into our office every day.”
Mr. Hitt grew up in the U.S. Midwest, but he’s a New Yorker now who also takes time to decompress outside of Manhattan.
“I love that I can get anything I need within a couple of blocks. But I also love my ability to get away from all that.”