interest rates

Higher Rates and Short Supply: The State of Real Estate in 2022

Higher Rates and Short Supply: The State of Real Estate in 2022

Canada’s housing market hit a boiling point last year as homebuyers clambered for real estate in regions with significantly more demand than supply. But now that homeowners and buyers alike are feeling the pinch of rising interest rates and record inflation, the market appears to finally be simmering down.

That, in turn, could create a welcome opening for shoppers to be more selective with their searches in Milton On and Surrounding areas. However, buyers hoping for a major downturn in prices may be left disappointed. Although home values in some segments are beginning to sag under the weight of higher borrowing costs, a persistent housing shortage is expected to keep prices high.

Read on for a closer look at some of the top factors impacting Canada’s real estate market and how they could affect you.

 

RISING MORTGAGE RATES ARE COOLING AN OVERHEATED MARKET

Over the past couple of years, homebuyers have faced record-high price appreciation and intense competition—in part due to historically low mortgage rates that were a result of the Bank of Canada’s efforts to keep the economy afloat during the COVID-19 pandemic.1

According to the Canadian Real Estate Association (CREA), in 2021, both the number of sales and average home price hit at an all-time high, with demand for new homes far exceeding supply.2 This trend continued through early 2022, despite widespread predictions that the Bank of Canada was gearing up to increase interest rates.3

But now that the central bank has officially begun pushing its key interest rate back up from emergency levels, the housing market is responding, with the pace of home sales cooling in March and April.4 The Canada Mortgage and Housing Corporation (CMHC) predicts that the housing market will continue to moderate in the coming year.5

The feds plan to keep raising interest rates as necessary to fight inflation, which means target rates could rise by another 1 to 2% or more over the next year.6 That, in turn, will cause both fixed and variable mortgage rates to rise.

As Senior Deputy Governor Carolyn Rogers noted in May: “We need higher rates to moderate demand, including demand in the housing market. Housing price growth is unsustainably strong in Canada.”7

What does it mean for you?

If you’re shopping for a new home, expect mortgage rates to keep rising into 2024.8 So, you’ll need to act fast if you want to get in at a lower rate. However, the cooling effect should make for a less competitive market. We can help you chart the best path.

If you’ve been thinking about selling, higher mortgage rates may shrink your pool of potential buyers, so don’t wait too long to list. And if you are up for a renewal, you should also act quickly or risk paying a higher rate. Contact us to discuss your options.

 

DEMAND AND PRICES ARE STARTING TO SOFTEN IN SOME SEGMENTS

Nationally, home prices soared a record 26.6% last year, an unsustainable rate of appreciation by any measure.9 But now that the Bank of Canada has put rock-bottom rates in the rear view window, sales have begun to slow.

Soon after the Bank of Canada began raising interest rates in early March, the real estate market responded. According to the CREA, in March, home sales fell by 5.4% on a month-over-month basis and the Aggregate Composite MLS® Home Price Index (HPI) ticked up just 1%, “a marked slowdown from the record 3.5% increase in February.”10

By April, home sales dropped by another 12.6% over the previous month as homeowners and buyers continued adjusting to higher rates.. “Following a record-breaking couple of years, housing markets in many parts of Canada have cooled off pretty sharply over the last two months, in line with a jump in interest rates and buyer fatigue,” said CREA Chair Jill Oudil. Meanwhile, prices are still rising in some markets, but are sagging in others, causing the HPI to dip in April for the first time since 2020.11

As the Bank of Canada continues pushing up rates, more buyers may give up on their homeownership dreams if they feel too squeezed by the combination of high rates and high prices. Still, many experts say a major downturn in prices is unlikely. That’s in part due to the fact that there still aren’t enough homes available to meet the demands of a growing population, says CREA CEO Michael Bourque. “The supply of new homes is not even close to keeping up with demographic changes and population growth.”12 As long as housing remains a scarce asset, prices will remain relatively elevated.

What does it mean for you?

If you’ve been waiting to buy a home in the GTA, Milton On and surrounding areas, now may be the perfect time to jump in the market. There are deals to be found if you know where to look. But don’t wait too long, or higher mortgage rates will erode any cost savings. We can help you find the best opportunities in today’s market.

For homeowners, the outlook is still bright. Governmental interventions are being put in place to stabilize the market–not crash it. And demand for housing and a strong job market should help protect your investment.

  

INVENTORY REMAINS TIGHT

According to the CMHC, housing starts trended higher in April after a small downturn in March. Overall, new homes are still being built at a faster clip today than in the past, but at a slower pace than we saw in 2021, noted CMHC Chief Economist Bob Dugan.13 Homebuilders are facing a wide range of challenges, including persistent inflation, rising rates, and ongoing labour shortages.

Increased federal investment could help counteract at least some of those challenges. The federal government recently announced plans to help double the pace of housing construction over the next decade by funding significantly more new and affordable housing. It also announced additional relief measures, including a temporary ban on foreign investment, doubling first-time buyers’ tax credit, and halting blind bidding wars.14

In addition to fewer homes being built, new listings are also down, according to the CREA’s sales report. But a decrease in demand is offsetting the impact in some areas. “A little more than half of local markets were balanced markets…a little less than half were in seller’s market territory.”11

What does it mean for you?


While supply remains at historically low levels, even a modest bump in inventory can help take pressure off of buyers. If you’ve had trouble finding a home in the past, give us a call to discuss what we’re currently seeing in your target neighbourhood and price range.

If you’re a homeowner, it’s still a great time to sell and cash out those big equity gains. Contact us to find out how much your home is worth in today’s market.

 

WE’RE HERE TO GUIDE YOU

While national real estate trends can provide a “big picture” outlook, real estate is local. And as local market experts, we can guide you through the ins and outs of our market and the local issues that are likely to drive home values in your particular neighbourhood.

If you’re considering buying or selling a home, contact us now to schedule a free consultation. We can help you assess your options and make the most of this unique real estate landscape.

 

 

Sources:

  1. Bank of Canada –
    https://www.bankofcanada.ca/2020/03/press-release-2020-03-27/
  2. Global News –
    https://globalnews.ca/news/8516543/canada-home-sales-record-crea/
  3. CBC –
    https://www.cbc.ca/news/business/crea-housing-february-1.6385274
  4. Canadian Real Estate Association –
    https://www.crea.ca/housing-market-stats/stats/
  5. Canada Mortgage and Housing Corporation – https://www.cmhc-schl.gc.ca/en/media-newsroom/news-releases/2022/housing-markets-moderate-historic-2021-levels
  6. Bank of Canada –
    https://www.bankofcanada.ca/press/press-releases/
  7. Reuters – https://www.reuters.com/world/americas/bank-canada-says-strong-demand-risks-higher-inflation-2022-05-03/
  8. Better Dwelling – https://betterdwelling.com/canadian-mortgage-rates-to-surge-demand-will-be-slowest-in-recent-history-moodys/
  9. CBC –
    https://www.cbc.ca/news/business/crea-housing-december-1.6317503#
  10. Canadian Real Estate Association – https://www.crea.ca/news/march-home-sales-and-new-listings-ease-back-following-surge-in-february/
  11. Canadian Real Estate Association – https://www.crea.ca/news/home-sales-drop-in-april-as-mortgage-rates-shoot-higher/
  12. Global News –
    https://globalnews.ca/news/8716412/canada-housing-market-cooling-bubble-interest-rate/
  13. Canada Mortgage and Housing Corporation – https://www.cmhc-schl.gc.ca/en/media-newsroom/news-releases/2022/canadian-housing-starts-trend-higher-april

Office of the Prime Minister of Canada, Justin Trudeau – https://pm.gc.ca/en/news/news-releases/2022/04/13/helping-young-people-get-housing-market

Posted by Christine Pecharich
5 Factors That Reveal Where the Real Estate Market Is Really Headed

5 Factors That Reveal Where the Real Estate Market Is Really Headed

In a July release, the Canadian Real Estate Association reported that home sales had fallen for three months in a row after reaching an all-time high in March.1 So could one of the world’s hottest real estate markets finally be headed for a downturn?

We wouldn’t bet on it. That’s because even though sales have slowed, it was still the strongest June on record—and 13% higher than last year.1

“Don’t be fooled — this is still an extremely strong level of demand,” Bank of Montreal Economist Robert Kavcic told CBC News. “Home sales have backed off extreme levels seen in recent months, but demand is still historically strong and driving strong price growth. We believe that sales activity will continue to gradually cool in the year ahead, but it’s going to take higher interest rates to soften the market in a meaningful way.”1

So what can we expect from Canadian real estate? Here are five factors that illustrate where the housing market is today and is likely heading tomorrow.

 

HOME PRICE INCREASES MAY LEVEL OFF NEXT YEAR

The Canadian Real Estate Association predicts the national average home price will reach $677,774 by the end of 2021, which would be a 19.3% increase over last year. “While market conditions have eased a little in recent months, they nonetheless continue to favour sellers to some extent in virtually all local markets,” the association says.2

But for the remainder of 2021 and into 2022, the association anticipates pricing trends will head toward more normal territory. “Limited supply and higher prices are expected to tap the brakes on activity in 2022 compared to 2021,” according to the association.2

That translates into the association’s forecast of only a 0.6% uptick, to $681,500, in the national average home price for 2022.2 If that happens, it could prompt some buyers who had been reluctant to make purchases this year to enter the market next year.

What does it mean for you?

If you’re a homeowner, now might be the time to look at selling. That’s because the number of available homes continues to be relatively low, and price appreciation has begun to slow. We can help you prepare and market your home to take advantage of the current seller’s market.

 

HOME SALES ARE TAPERING OFF

If the 2021 home market in Canada is a wildfire, then 2022 could be more like a campfire. The Canadian Real Estate Association anticipates a slowdown in home sales activity in 2022 following an extremely busy 2021.3

An estimated 682,900 properties are expected to trade hands through Canadian Multiple Listing Service systems in 2021, which would be an increase of 23.8% from 2020, the association says.3

Next year is shaping up to be much less active, with national home sales forecast to decline 13% to around 594,000 properties in 2022.3

“This easing trend is expected to play out across Canada,” the association says, “with buyers facing both higher prices and a lack of available supply, while at the same time the urgency to purchase a home base to ride out the pandemic continues to fade alongside the virus itself.”3

The “easing trend” is already happening. Across the country, a record-high 69,702 homes were sold in March. But just a month later, the national number of homes sold slipped 12.5% to 60,967. ⁴ Home sales volume dropped another 7.4% in May to 56,156. ⁵

“One of the world’s [most active] housing markets appears to be slowing down,” the Bloomberg news service proclaimed in June in a report about the Canadian home market. ⁶

What does it mean for you?

Are you struggling to buy a home in today’s highly competitive market? If so, 2022 might be a good time to pursue a purchase because you may face less competition. However, one drawback of waiting is that mortgage rates are expected to go up. We can help put you on the right path toward homeownership, whether you want to buy now or next year.

 

SUPPLY OF HOMES REMAINS LOW

The housing shortage in Canada persists.

Before the pandemic, the number of available homes nationally sat at a 14-year low and the number of months of inventory had fallen below four months, according to the Canadian Real Estate Association.3

Inventory below four months puts the supply in “seller’s market territory,” the association says.3 Inventory refers to the number of months it would take for the current supply of homes on the market to be sold at the existing pace.⁷

In June, the Canadian Real Estate Association reported the national inventory of available homes was close to two months, reflecting an “unprecedented imbalance of supply and demand.”3 National inventory hit a record low of 1.7 months in March, compared with the long-term average of more than five months. ⁷

“At a time where so many markets are struggling with historically low inventory, sales activity depends on a steady stream of new listings each month,” the association says. ⁷

What does it mean for you?

A tight supply of available homes puts sellers in a strong position as long as demand stays high. So, if you’re a homeowner, placing your home on the market when demand exceeds supply could bring you a higher price. We can help you figure out when to sell so that you extract the maximum value from your home.

 

HOME CONSTRUCTION ON THE VERGE OF STABILIZING

Newly built homes add, of course, to the supply of homes available to buyers. And it appears that home construction in Canada is on the upswing. ⁸

For all of 2021, construction is projected to begin on as many as 230,000 new homes in Canada, up from a little over 217,800 in 2020, according to the Canada Mortgage and Housing Corp. (CMHC). Even more homes could get underway in 2022 (as many as 234,500) and 2023 (231,900). ⁸

“Housing starts will stabilize at levels consistent with household formation by the end of 2023,” according to CMHC. ⁹

What does it mean for you?

More newly built homes coming on the market could mean an opportunity for buyers, as construction boosts the supply of available properties and eases the strain on demand. Bottom line: An influx of new homes may open more doors to homeownership. We can give you a hand in locating a new or existing home that fits your budget and your needs.

 

MORTGAGE RATES ARE SET TO RISE

Low mortgage interest rates help entice buyers to make a home purchase. That’s certainly been the case in Canada in recent months. However, mortgage rates are poised to creep up this year and next year, and even into 2023.10

An analysis from Mortgage Sandbox indicates five-year Canadian mortgage rates are expected to remain low by historical standards, but they are expected to continue rising in 2022 and 2023. The analysis indicates the fixed rate for a five-year mortgage could climb to 3% in the third quarter of 2022. ¹¹

Low mortgage rates typically make it easier for homebuyers to qualify for a mortgage, as well. But on June 1, the Office of the Superintendent of Financial Institutions raised the mortgage “stress test” qualifying rate from 4.79% to 5.25%.12

According to the Toronto Sun, “It was intended in part to slow down the overheated housing market and likely in part because inflation (and higher interest rates) is on the horizon.”12

In a recent report, the British Columbia Real Estate Association forecast, “rising Canadian inflation — and the extent to which that inflation is a temporary phenomenon — is set to shape how rates evolve over the next year.”13

What does it mean for you?

Given the prospect that Canadian mortgage rates may go up during the rest of this year and into 2022, now might be the right time to think about borrowing money to buy a home. When interest rates rise, you pay more to borrow money. Whether you’re buying a new home or up for a renewal, you can lower your risk by locking in a fixed-rate rather than variable-rate mortgage.

 

 ARE YOU THINKING OF BUYING OR SELLING?

It can be tough to sort out the Canadian housing market—where are home prices heading, are mortgage rates going up, is it the right time to buy or sell? We can help you answer all those questions, and more. We then can work with you to come up with a plan tailored to your unique situation. Let us be your partner in the homebuying or home-selling journey.

 

 

 

 

Sources:

  1. CBC –
    https://www.cbc.ca/news/business/crea-june-stats-1.6103715
  2. Canadian Real Estate Association –
    https://www.crea.ca/housing-market-stats/quarterly-forecasts/
  3. Canadian Real Estate Association – https://www.creacafe.ca/quarterly-forecast-housing-activity-to-continue-easing-over-second-half-of-2021-and-into-2022/
  4. Global News –
    https://globalnews.ca/news/7868251/canada-home-sales-down-april/
  5. Global News –
    https://globalnews.ca/news/7950863/canada-home-sales-may-crea/
  6. Bloomberg – https://www.bloomberg.com/news/articles/2021-06-15/canada-housing-worlds-second-bubbliest-market-starts-to-look-fatigued
  7. Canadian Real Estate Association –
    https://creastats.crea.ca/en-CA/
  8. Canada Mortgage and Housing Corp. – https://assets.cmhc-schl.gc.ca/sites/cmhc/professional/housing-markets-data-and-research/market-reports/housing-market/housing-market-outlook/2021/housing-market-outlook-61500-spring-2021-en.pdf
  9. Canada Mortgage and Housing Corp. – https://www.cmhc-schl.gc.ca/en/blog/2021/housing-markets-expected-moderate-risks-remain
  10. Global News –
    https://globalnews.ca/news/7962282/rising-interest-rates-canadas-housing-market/
  11. Mortgage Sandbox –
    https://www.mortgagesandbox.com/mortgage-interest-rate-forecast
  12. Toronto Sun –
    https://torontosun.com/opinion/columnists/wild-new-stress-test-rate-makes-it-more-difficult-for-home-buyers-to-qualify-for-mortgage
  13. British Columbia Real Estate Association – https://www.bcrea.bc.ca/wp-content/uploads/mortgagerateforecast.pdf

 

 

Posted by Christine Pecharich in Blog Posts