No one can tell where the ball might stop.
Let’s start from the beginning of this situation. Average home prices went up almost 28% in 2020 and 30% in 2021 respectively. There are many reasons for this.
Most of it has to do with government policies (quantitative easing, low interest environment and loose handling of appraisals etc.) We have talked about this a few times and have explained how the Canadian housing market is controlled by government policies.
A slow down is possible if our government decides to bring in a housing correction. Our market is manipulated by our policy makers in a big way. Our market can crash or go for a soft decline if our government brings in new rules to stop the double-digit price increase.
This can be done by increasing the housing inventory, change banking policies; like bringing in tighter debt-to-income ratios, stricter underwriting policies, or by bringing in rules to stop investors from buying multiple properties, or to bring in some major tax changes that can make real estate profits more taxable etc.
Some of the moves from our Government in this direction
Buying on Work Permit rules and Non Resident Speculation Tax (NRST) rules have been revised. Adding HST on the profits when doing assignments sales. These two recent moves from the government are measures aimed at slowing down the market. Interest rates have gone up because of inflationary pressure all across the world. And we can expect further increases in interest rates in Summer and Fall.
CMHC Prediction Comes True Finally
Last year (on September 28, 2021), The Canada Mortgage and Housing Corp. (CMHC) had raised its market risk assessment to high from moderate, in a report showing that both activity and prices remained near record levels reached earlier that year amid rock-bottom mortgage rates and a consumer frenzy for bigger homes.
They had said the country was at a high risk of a sharp correction in home valuations as the continued appreciation in prices is no longer attached to the economic fundamentals. And this has come to pass in Spring 2022
However, as we are moving from a Seller’s market into a Buyer’s Market, lower prices are a boon for the hopeful buyers.
Our Two Cents
The fear of rising mortgage rates and new Government regulations have created uncertainty in the real estate market. There can be a further price softening, but we do not expect a major price correction. Our best guess is that buyers and sellers will become comfortable with this new market by September when we return to a more normal level of activity and prices.
Influx of new immigrants could ease the price drop, as people with good income and a permanent resident status will be buying homes now that they are cheaper than they used to be.
However, our Real Estate market can also crash if there are some external problems like higher inflation, higher interest rates, any geo-political events etc. People who are leveraged heavily can further contribute towards the plunge as they may start off-loading their properties with not many buyers in the marketplace.
Anything is possible!
In the long run real estate prices are bound to go up again with the two most important factors governing real estate especially across the GTA – immigration and lack of housing supply.
As per the April 2022 TRREB Market Watch Report, The GTA housing market continued its adjustment to higher borrowing costs, with the number of transactions down on a monthly and annual basis. GTA REALTORS® reported 8,008 homes sold through TRREB’s MLS® System in April 2022 – a 41.2% decrease compared to April 2021 and a 27% decrease compared to March 2022.
The GTA housing market continued its adjustment to higher borrowing costs, with the number of transactions down on a monthly and annual basis. With the interest rate going up twice this year already and sitting at +1% currently, some home buyers have moved to the sidelines till the end of the year, waiting for the subsequent interest rate increases through this Summer and Fall.
Single Family Residential
The decline in home sales for the month of April were particularly for detached houses. The average home selling price was $1,254,436, which is15% higher compared to April 2021, but down compared to the average selling price of $1,300,082 in March 2022. It is expected that there will be enough competition between buyers to support continued price growth relative to 2021, but the annual pace of growth will moderate in the coming months.