The Canadian housing market could lose as much as a quarter of its value as the market declines and interest rates increase faster than anticipated. An unprecedented boom throughout the pandemic drove Canadian home values to record levels. But they have reversed since the Bank of Canada began raising interest rates in March to prevent the broader economy from overheating.
The declines so far have been sharpest in markets with the biggest pandemic run-ups. However, the drawback in Toronto and communities around is an emerging sign that the weakness is now spreading across the country. According to economists, the declines so far and the rate hikes are driving them already out-pacing previous forecasts. Therefore, the average home price in Canada is expected to fall below 25% by the end of next year after hitting a peak in February.
Opportunities for first-time home buyers
The Canadian Housing Market slowdown may be long overdue for a segment of the market that faced a steep uphill over the past couple of years. The slowdown is an opportunity for first-time home buyers that are squeezed out because of affordability challenges and intensive competition to buy a home. Also, new entrants to the market who are employed with a solid income and can afford a down payment will be well positioned in the current environment. However, current mortgage qualifying rules remain a significant obstacle for that cohort.
Challenges for first-time home buyers
The stress of buying a house in this season is certainly holding a lot of people back. Borrowers who choose a fixed-rate mortgage are facing bigger problems because of the new rules introduced. That is, borrowers must qualify at the higher of 5.25% or the contract rate plus 2%. Under those criteria, borrowers who choose a fixed option must prove they can afford a rate between 6% and 7% as fixed rates creep upwards.
The slowdown is also creating a five-year variable rate funnel, where more and more Canadian first-time homebuyers are getting pushed into a variable rate. These allow them to qualify for more money, even though they may not be best suited for the risk of a variable-rate mortgage.
Price adjustment
The slowdown in Canadian home prices is the most major decline the housing market has experienced since 2005. Toronto is already reporting a 3.9% decline in its home-price index, capping its worst four-month drop since 2005. Nevertheless, because the increases in the previous two years were so dramatic, average prices should still end in 2023. According to the Desjardins economist, these average price is still higher than they were before the pandemic.
Here are the opinions of some Canadian economists:
“Canada’s housing market is correcting quickly and faster than we anticipated,” Bartlett, the firm’s senior director of Canadian economics, and his colleagues said. “While we don’t want to diminish the difficulties some Canadians are facing, this adjustment is helping to bring some sanity back to Canadian real estate. Many markets are returning to balance, and affordability is on track to gradually improve as prices fall.”
Trends across the country
- The biggest factor driving the national number is lower in Ontario. This is where most markets are seeing significant price declines.
- Despite the recent slowdown, house prices remain prohibitively high for many borrowers. These continuous trends could see options like co-ownership become more prevalent in the Canadian housing market.
- More and more Canadians are entering into laneway housings, an opportunity for them to add a co-unit to support these higher living costs.
- The numbers in the Greater Toronto Area look bleak, and that’s the part of the country that saw the most prominent run-up in prices earlier due to large investors piling into a rising market. Some GTA buyers also purchased their homes before selling their old ones, thinking the market would remain hot, and are now being forced to accept lower prices to complete their transactions.
- More first-time homebuyers are struggling to purchase in different geographic areas of the country as prices become higher.
- Sales and prices are down disproportionately in Ontario and British Columbia, which suffered severe affordability deterioration during the pandemic.
- There is a growing inventory in the Canadian housing market. That means buyers no longer have to decide in 15 minutes on whether to buy a home or not. Also, they do not have the fear of missing out on an opportunity.
- Initiatives, such as in-law suites and laneway housing, are becoming increasingly common. This is because Canadians are searching for new ways to purchase a home amid those affordability struggles. But these initiatives can offset some of the higher costs.
Final thoughts
The real estate Canada and mortgage markets may have cooled off substantially in recent weeks but it is bringing opportunities for buyers. These include greater choice and less competition from rival bidders.
