We are currently seeing a dramatic shift in the housing market with housing activity slowing down, thanks to a drop in demand. The housing market cool-down was prompted by rising interest rates, with the most recent quote for two-year fixed mortgage rates rising to 4.03 per cent.
Mortgage insurers in Canada are seeing a drop of nearly 40 per cent on unit application volume. Borrowers who are up for renewal will see their rates double in many cases, creating some real risk in the markets. The sales-to-new listings ratio in Toronto suggests that sales and selling prices will begin trending downwards at a rapid pace. In addition, other inflationary pressures such as fuel, the cost of food and other worldwide conflicts and challenges risk pushing the economy into a recession.
The dual impact of rising rates
One of the impacts of interest rate increases on potential homebuyers is with respect to their house-buying power, which has been reduced by almost $100,000 in many areas. However, we have also seen increases in household income, which has helped to temporarily ease the loss in house-buying power, that is, until we see another rate increase.
Another impact of rising interest rates is the financial disincentive that is created for sellers to sell their homes and buy a new home at a higher mortgage rate, which will further constrain housing supply and make real house price declines potentially unlikely. As a point of reference, the 30-year average fixed five-year rate is just over eight per cent, compared to where we have been and the current posted rate of four per cent.
Housing related-measures
Building
The housing accelerator fund, rapid housing initiative and multi-generational home renovation tax credit will not impact the supply or market materially. These measures still have yet to be passed, and to be meaningful, overhaul of the municipal approval process and reduction of red tape is required to accelerate delivery times of new homes.
Saving
The proposed Tax-Free First Home Savings Account, increase to the First-Time Home Buyers Tax Credit (HBTC) as well as the proposed increase to the Home Accessibility Tax Credit (HATC) are all positive measures, but will not provide any material boost to enable those already marginally qualified to be able to enter the housing market. Notwithstanding that Canadians saved record amounts during the pandemic, the recent spike in borrowing costs coupled with the increases in prices, services have easily eroded any additional buying power that they may have had.
Anti-flipping and foreign investment ban
The proposed anti-flipping and foreign investment ban are not based on any sound data or research. While politically this may appeal to voters, the fact remains there is little research to back up the “assumption” that the overheated market has been caused by foreign buyers and other investors.
Condo market
While overall activity has declined, condo supply continues to remain very constrained in the primary GTA markets. However, new pre-construction launches continue to be very popular.
Signs that developers are having to be more competitive, such as offers of rental guarantees, upgrades, inclusion of parking spaces, cash back and more flexible deposit structures are being seen now.
The key going forward is for buyers to ensure that the developers have “cost certainty” around their proformas. Recent reports of buyers having to cough-up additional funds to cover the massive increases in construction costs have made pre-construction buyers a little wary of what they are getting into.
According to data from Right at Home, looking at January to May 2022 versus January to May 2021, we see price increases of 22 per cent on sales and a 13 per cent increase in rentals. On the transaction volume side, there is a decline of nine per cent, while lease transaction volume has declined by 11 per cent over the same period.
A 2022 Forecast
Rate increases, conflicts, supply constraints, savings and the recent relaxation of travel and other COVID-19 related measures will all contribute to the consumer taking a break from the real estate market and heading off to cottages and other destinations.
As such, we will continue to see a drop in market activity. This should not be translated into a crash, or bubble bursting or even major price drop. While the price acceleration will certainly slow, inflationary pressures will keep the new home/condo markets at their current levels and the continued restrained supply of resale homes will also serve to keep prices from dropping precipitously.
Subject to world events and federal policy makers being able to impact rising inflation in a positive way, we could see a slight rebound in the fall real estate market. Effectively, the 2022 spring market has been a “no-show”. Given that comparisons to 2021 and 2020 are not as relevant, we feel, 2019 is a much better frame of reference and as such, this is still a healthy real estate market. . . for now.
