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Montreal Market Update (Spring-Summer 2015)

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Estimated reading time: 7 minutes, 50 seconds.

Highlights:

  • Employment is on an upward trend with an expected 1.2% growth rate in 2015 and 1.5% in 2016, which will have a positive effect on housing demand this year. This is foreseen not only in the areas surrounding the new super-hospitals in NDG but also around the Downtown core and in the South West of Montreal.
  • Housing starts will fall significantly in 2015 (-14 per cent) and then rise slightly in 2016 (+3 per cent). „
  • In 2015-2016 Montreal will see a slow rise in transactions on the resale market- increasing slightly in 2015 (+2 per cent) and 2016 (+3 per cent).
  • The rental housing vacancy rate will remain rather stable, reaching 3.6 per cent in 2015 and then 3.7 per cent in 2016.
  • Market conditions remain favourable to buyers, and the growth in the average price will be relatively weak (+2 per cent annually). „

Understanding the data:

How will market and demographic changes impact the types of homes that are built in the near future?

An interesting trend is the significant rise of senior housing complexes. There are two economic reasons for this. Firstly, a few years ago Canadian banks introduced tighter financing criteria including a reduction in the maximum amortization period (implying a higher monthly mortgage rate). This made it harder to first time buyers to enter the market as young investors. Simultaneously, the slower growth of the 20-34 year old population limited the number of first time buyers entering the market. The number of first time transactions fell below average, at 39,000 purchases. On the other hand, as demand for bachelor pads lose steam, the quickly aging baby boomer population shows a large and urgent need for housing facilities in which they can age safely and comfortably. We discuss this point further in this article.

Why are the new starts* slowing down in 2015?

The decline in starts is due to the currently large supply of units on the market and the relatively weak growth in the demand fundamentals (economic and demographic). In 2016, activity should pick up slightly thanks to the construction of seniors’ housing units. In 2014 starts are expected to reach 16,100 units (-14 per cent) and in 2016 they are expected to reach 16,600 (+3 per cent).

Will the drop in housing starts apply to the condo developments in the South West?

The number of new condo projects (multi-unit housing starts) will decline considerably in 2015…by almost 15%! As this happens, the condo market will experience a major readjustment. Less than 8,000 condo starts are expected in 2015. This is because the condo market is in its absorption phase: builders will stop constructing new units and instead look towards units that are already under construction or are still unoccupied in previous phases of the project. On this note, the inventory of unoccupied condominiums has grown significantly in the last two years and reached nearly 2,800 units in March 2015.  This number is expected rise even higher over the next two quarters, as a result of the final touches on several new projects that are still underway. The large supply on the resale market further lowers the demands for brand new and pre-construction units.

Why is the resale market booming?

This year Montreal’s existing housing market has seen an increase in sales. Transactions were already up slightly (+1 per cent) over the corresponding period in 2014. Centris® sales should therefore reach 36,600 units in 2015 (+2 per cent): the first time in 5 years that there has been an increase (since 2010). Why? Partly because of the growth of the job market (leading to a higher provincial income), and partly because of the low mortgage rates in respect to earlier years. Housing affordability all in all remains stable.

Is this a favourable time to buy?

The condo segment, as previously discussed, is very much a buyer’s market. This mean that supply exceeds demand, providing buyers with low prices and a wide selection to choose from.

In the case of single-family homes, conditions will remain on the cusp between a balanced market and a buyer’s market*.  While this market segment will be balanced for the Montréal CMA, some disparities will be noted among the various sectors: conditions will be balanced on the Island of Montréal, in Laval and on the South Shore but will rather favour buyers on the North Shore and in Vaudreuil Soulanges. In the single family home segment, prices are expected to rise more significantly, while the plex segment (concentrated mostly on Montreal Island) will remain straddling a balanced and a buyer’s market. Centris®  shows a price increase price in the Duplex market of about 2% in 2015 (up to $338,000).

All in all, conditions will still remain somewhat favourable to buyers. First time buyers, click here to download our free e-book that will guide you through the ins and outs of making your first investment in real estate

What are the factors affecting the rental market and vacancy rates?

On one hand, the number of new rental condominiums (buildings owned by rental companies, where none of the units are listed for sale) increased by about 4,000 units in the Montréal area. In addition to that, the higher number of listings for sale on the market will prompt many owners to lease out their units while they await buyers. Lastly, investors also rent out their units. All this combined means that the supply of rental units is relatively high. On the other hand, the increase in net migration in the Montréal area forecast for 2015 and 20163 will help the conventional rental market regain some strength. Note that the majority of new migrants into the Montreal core are young adults between the ages of 25 and 35, who will contribute to the rental segment. All in all, the increase in supply and the increase in demand balance out the rental market, creating a stable environment.

Will the low mortgage rates change anytime soon?

Mortgage rates will remain low and supportive of housing demand, very close to current levels, on the forecast horizon. According to the Canadian M0rtgage and Housing Corporation’s base case scenario for 2015, the one-year mortgage rate is expected to be in the 2.30 to 3.50 per cent range, while the five-year rate is forecast to be within the 4.00 to 5.50 per cent range. In 2016, the one-year rate is expected to rise slightly to the 2.40 to 4.00 per cent range, while the five-year rate is forecast to be within the 4.20 to 6.20 per cent range.

What are some risks in the coming years? 

For future sellers, the lower than anticipated increase in export products in Canada could lead to a lagging economic growth, which would turn reduce employment and need for housing. For future buyers, the unabsorbed condo starts could prompt builders to slow down the pace of condo starts in the forthcoming years.

Any questions? Contact an agent here:

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