Price growth expectations and financial risk: top influences for homebuyers
Three quarters of homebuyers in three of Canada's largest housing markets are not willing to take financial risks when buying a home, according to the latest study by Canada Mortgage and Housing Corporation (CMHC). Despite this, nearly ninety per cent of homebuyers in Canada continue to believe real estate is the best long-term investment.
CMHC's latest Housing Market Insight (HMI) looks at the homebuyers' perceptions and risk attitudes in Montréal, Toronto and Vancouver and presents the highlights of the 2018 fall Homebuyers' Motivations survey.
The Homebuyers' Motivations survey is a complementary piece to traditional economic analysis with a focus on gaining a better understanding of subjective factors playing a role in explaining rising home prices in Canada . The insight report focuses on the subjective factors influencing homebuyers' purchase behaviours and housing demand.
A large majority of homebuyers (75%) indicate they are not willing to take financial risks. This result was consistent across the three markets: 77% in Montréal, 72% in Toronto and 76% in Vancouver .
Price growth expectations in one year were quite similar to the actual price changes the year before, except in Montréal where price growth expectations in 2018 were lower than the actual changes in 2017.
In Vancouver , price growth expectations went from 10% in 2017 to 1% in 2018. This can also be due to structural uncertainties in the global economy in 2018 that were not evident in 2017.
Short-term expectations were very low in 2018, but a majority of respondents (88%) maintained the idea that real estate is the best long-term investment.
In 2018, homebuyers in all three centres involved in bidding wars spent 24% more than the median price. The proportion of homebuyers who experienced a bidding war in Toronto dropped to 45% in 2018 from 55% in 2017.
In Montréal, the proportion of homebuyers who spent more than they budgeted increased from 24% in 2017 to 28% in 2018. In addition, the proportion of homebuyers who perceived foreign investors have a lot of influence on house prices in Montréal rose from 42% to 52%.
Respondents perceived traditional fundamental drivers, such as employment growth, interest rate changes and population growth, to be less influential than subjective ones linked to speculation, such as city attractiveness and the presence of foreign investors.
The dominance of subjective factors was obvious in Vancouver , while respondents in Toronto perceived population growth to be influencing housing prices the most. The fact that subjective factors have a greater influence on house prices can lead to higher house price growth expectations, which makes homebuyers more willing to pay a higher price.
Financial risk appetite decreases with the age of homebuyers. Among young buyers under the age of 35, 88% had some appetite for financial risk. The higher the income of respondents, the more willing they are to take financial risks. Thirty-one percent of the respondents who were not willing to take risks earned less than $60,000 , while only 11% of those who were not willing to take risks earned more than $200,000.
As Canada's authority on housing, CMHC contributes to the stability of the housing market and financial system, provides support for Canadians in housing need, and offers unbiased housing research and advice to all levels of Canadian government, consumers and the housing industry.
"Since increases in housing prices cannot be explained by economic fundamentals alone, subjective factors like city attractiveness and perceived price growth must play a role. This report, and the survey it is based on, helps us shed light on homebuyers' perception of how subjective factors influence housing markets and will improve our understanding of housing markets in Canada ."
Senior Specialist, Housing research
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