It’s hard to believe, but Canada’s epic real estate boom could be coming to an end. It was the ominous warning of Gardens, one of the country’s leading financial institutions. They see higher mortgage rates slowing demand significantly over the next few months. The market is expected to cool so much that they will see real estate prices fall towards “real value” next year.
Canadian home price growth has peaked
Real estate prices in Canada have seen maximum growth, but have enough momentum to hold values for a few months. The institution cites that the average selling price in Quebec has reached 15% since last year, and that Ontario is experiencing growth of 10 to 30% in the main markets.
“Although prices have risen significantly from a year ago, monthly increases appear to be weakening in both provinces, perhaps a harbinger that the frenzy is waning,” wrote l ‘institution.
Higher mortgage rates will curb demand for home purchases
Strong population growth and strong wage fundamentals are still intact, so why the slowdown? The institution attributes it entirely to the rise in interest rates to calm inflation. They project that 5-year fixed rate mortgage interest rates will soon top 4%, more than double the pandemic low. Doubling interest charges will certainly deflate demand a bit.
Existing variable rate borrowers are also under pressure. Desjardins explains that most borrowers won’t necessarily see their payments go up, but will see fewer of their payments go to principal. “So they will have to refinance more of their mortgage at renewal,” they explain.
This rise in mortgage rates should cool demand for resales and first-time buyers, reducing pressure on prices. In general, higher costs will constrain budgets, reducing demand.
The institution warns, “while it may seem difficult to imagine today, the housing boom will soon give way to a lull”.
Real estate prices in Canada are expected to fall next year
Weak demand and shrinking budgets are a recipe for falling home prices. They argue that lower demand will mean fewer multiple offers on a property, giving buyers more bargaining power. While only a cooling is expected this year, by next year they say “it seems inevitable” that prices will fall, at least in Ontario and Quebec.
“Sales prices should return towards the real value of the properties, that is to say lower than the price peaks that we experienced at the height of the frenzy”, they explain, probably leaving many questions about what means the actual value.
Although they don’t elaborate, a house is worth what someone is willing to pay. If higher mortgage rates squeeze budgets, homebuyers will also see the maximum level of debt they can bear go down. If buyers can afford to pay significantly less, sellers can keep their properties or adjust their expectations.