Are you a buyer or seller trying to navigate the rollercoaster that is the current Canadian housing market? With the real estate landscape constantly changing, keeping up with all the new decisions, announcements, and resultant market changes can be challenging. Not to mention understanding how these changes affect you and your home. Though there are many reasons why the Canadian housing market has been experiencing these fluctuations, the good news is that house prices are currently recovering – but how could that happen considering everything we’ve experienced over the last several years? Well, today, our experts at Soni Chachad Real Estate are going to break down everything you need to know about the current Canadian housing market so that you can make an informed decision regarding your next real estate transaction.
BoC Rate Hikes
By now, you’re likely well aware of the rate hikes implemented by the Bank of Canada (BoC) over the past 12 months or so. With the prime interest rate spiking from 0.25% to 4.50%, this was the biggest percentage increase in Canadian history. In the real estate world, we would expect that a prime rate jump like this would trigger a significant economic contraction and unemployment within 12-18 months, and yet, there has been no increase in unemployment in Canada so far. Furthermore, home prices should have been skyrocketing, but they, in fact, have been falling until just recently, at the start of Q2 2023. So, the question becomes, why?
Real Estate Landscape
In order to understand the ‘why,’ we need to turn back to the beginning of the pandemic to understand the build-up that has resulted in what we’re experiencing now. Phil Soper, President and CEO of Royal LePage, stated, “There has been nothing ‘typical’ about Canada’s housing market since the start of the COVID-19 pandemic. Lockdowns brought the housing market to a grinding halt in early 2020 before the work-from-home revolution catapulted it into a two-year, all-season frenzy of record sales volumes and aggressive price growth. As markets do, this market overshot, and the inevitable correction was triggered when the Bank of Canada began to rapidly raise interest rates. The downturn came swiftly, and the real estate industry remained depressed for twelve months, a longer correction than the aftermath of the financial crisis thirteen years ago. We have turned the corner, and the housing economy is growing again.”
Sidelined Buyers and Low Inventory
With this foundation in mind, let’s examine a few reasons that the Canadian real estate market is on such a rollercoaster. Beyond this rebounding (which is a contributing factor, but certainly not the entire story), the BoC rate hikes also sidelined many buyers who were anxious about locking in at such a high rate. With buyers less active, this is when we were seeing home prices falling, like in Q1 2023, for example. But now, in Q2 2023, the housing market faces a different problem – low inventory. One reason is inflation, which has increased the cost of materials and labour for new builds, coupled with a lack of skilled tradespeople. The result is a chronic shortage of housing supply in Canada. However, there’s one more factor that has blunted the effects of this massive prime increase and contributed to lower inventory, and that is emergency re-amortization.
We need to ask ourselves: how did a quadrupling of mortgage rates not completely kill buyer demand? And what happened to all the distressed listings that were expected to flood the market from people who can’t meet their higher mortgage obligations? Well, the answer is simply that the banks, with the support of regulators and the federal government, quietly changed the rules to prevent a mortgage crisis. As mortgage rates sore alongside the BoC interest rate hikes, lenders and mortgage providers are using emergency loan-modification options that allow some struggling homeowners with a variable-rate mortgage to extend their amortization periods up to 40 months in an effort to reduce their payments. Some homeowners have even secured amortizations of 70 years or more! In these types of cases, homeowners will be paying much more interest while paying off little to none of the principal amount (or, in other words, their actual debt). Although it’s excellent to see these homeowners get the opportunity to keep their homes, one obvious issue with extending the mortgage period to this length is that it can create multi-generational debt. It also means there is far less pressure to sell these houses, which contributes to this lack of inventory and could potentially spark yet another price spike for Canadian homes.
BoC Rate Pause
So, what’s the good news? Well, following the March 8th and April 12th rate decisions, the BoC opted to hold its overnight rate steady, announcing a ‘conditional pause’ on rate hikes as long as inflation continues to drop in line with their forecast. The less good news? They have left the door open to further rate hikes if inflation and economic growth don’t ease as much as expected. So now, regarding the real estate industry, the question becomes: will supply or demand outpace the other, or will they be balanced in the coming year?
Although with many of these questions, only time will tell, there are some things we know for sure. For one, the Canadian housing market is experiencing a strong recovery (against all odds), and most provinces saw their provincial average home price increase compared to last month. Specifically in Ontario, the average home price was $881,946 in March 2023, which was a drop of 16% year-over-year but an increase of 8% month-over-month. Furthermore, the next BoC rate announcement will come on June 7th, 2023, which is one of the eight scheduled dates each year that the BoC releases its rate decision. As long as economic growth remains strong and inflation is tamed, there would be no reason to assume we’ll see yet another increase (though this we can’t say for certain). Ultimately, the factors affecting the housing market are complex and multifaceted, and it will be interesting to see how the Canadian housing market continues to evolve over the coming months.
If you’d like more information regarding the current Canadian housing market or if you’re searching for an experienced, reputable realtor in the Golden Horseshoe region to represent you as a buyer or seller in your next home transaction, be sure to check out my featured listings and do not hesitate to reach out to me directly!