OK, let’s count how many things are currently working against the Canadian real estate market.
1. Mortgage interest
: They are 25 basis points above the 20-year average and rising.
2. Population decline
: Demand for housing requires warm bodies, and our annual population just declined for the first time since Confederation.
3. Dynamics
: The Canadian Real Estate Association (CREA) benchmark house price has fallen 20 per cent since February 2022 and is still trending downward. Adjusted for inflation, the price reduction is almost 30 percent. And for the first time in 27 years, the average homeowner saw their home lose value over a five-year period.
By the way, just yesterday Bank of Canada Deputy Governor Carolyn Rogers said: “We need to bring down house prices to make housing more affordable. Without a slight correction in house prices, there is no real path to affordability, particularly in some of our major centres.”
So we probably shouldn’t wait for the Bank of Canada to bail out housing by cutting interest rates.
4. Pricelessness
: Despite significant improvements since the start of 2022, the gross debt service ratio for an average home purchased by an average dual-income household – which is forced to qualify for the government’s restrictive stress test – stands at 33.5 percent. This is significantly higher than the 20-year average of 29.8 percent.
5. Supply
: Housing starts may have remained flat and CREA said new listings fell last month, but inventory is still 24 percent above the 10-year average and the supply of rental properties (a substitute for home purchases) continues to grow. We may face a supply shortage in the future, but in most markets – not all – oversupply is the problem, not undersupply.
6. Deterioration in mood
: Buyers see a weakening economy, new multi-year lows in prices, job market fears, alarming condo headlines, mortgage renewal fears, and so on and so forth. It’s all shouting to hundreds of thousands of Canadians, “Stay on the sidelines,” and frankly, the sidelines haven’t been this crowded in years.
7. Job cuts
: Estimated net job losses have reached nearly 100,000 in the past three months, and artificial intelligence and trade policy may be on the verge of the next round.
8. CUSMA uncertainty
: “The future (of the Canada-U.S.-Mexico agreement) is the most consequential macroeconomic uncertainty facing the Canadian economy this year,” Scotiabank Economics said recently.
If US President Donald Trump goes away and imposes painful tariffs on us, even for a short time, we will likely slide straight into a recession.
That’s eight headwinds, but it feels like I’m missing one. It’s on the tip of my tongue. Something about cruise missiles and oil refineries. It will come to me.
9. An oil shock
: It turns out that wars in the Middle East, which drive up prices and inflation expectations, are bad for mortgage rates. I looked at it. It checks out.
Typically, the fallout from oil shocks lasts at least three to six months, which is enough to drive up inflation expectations and make our central bank nervous (despite its promises to “see through” the immediate impact of the oil shock).
This is one of the last things Canada’s real estate market needs right now.
A disruption in oil supplies not only further deteriorates buyer sentiment, but can also lower asset prices across the board and make borrowing more expensive. With leverage already exhausted for most buyers, especially younger ones, higher interest rates would further depress maximum mortgage amounts and the amount homebuyers can afford.
Opportunities in the midst of chaos
Writing a dark story is the easiest task in journalism right now, but that’s not the point here.
There are also positive fundamentals for real estate: improvements in affordability driving future demand, longer paybacks, pent-up demand, wage growth, a shortage of single-family homes in some markets, and so on.
The point is simply to point out that the price risk is real – for now – especially if sellers become unsettled and start reacting more harshly by cutting prices.
This new threat of war, if it actually leads to a significant risk of inflation, cannot simply be ignored.
With this in mind, prudent buyers, sellers and mortgage lenders might consider:
- If applicable, earlier determination of mortgage interest rates;
- Do not rush to pay the highest price for an ordinary house.
- Insistence on financing and valuation terms in purchase offers;
- Realistic home pricing from day one;
- building a larger cash reserve;
- Adding a home equity line of credit for protection;
- Lowball developers are stuck with unsold inventory;
- Delay non-essential renovations if a sale is planned in the not-too-distant future;
- Refinance sooner rather than later in case values decline, your debt load increases, or your income decreases;
- Develop strategies for how and when to deploy capital when fire sale values are identified.
Real estate downturns are rarely a good time, but this war is helping us find a bottom quicker, so so be it. There is absolutely no doubt that Canada’s real estate market will bounce back in the coming years, but the difference between good timing and bad timing is the difference between buying at a trough and being at a trough.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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