Responding to a story I wrote saying the sky is not falling on Canadian real estate markets, an astute Western Standard reader disagreed, pointing out sales in Vancouver are down 35%, year-over-year..Large declines in sales, year-over-year, in markets across the country should not be treated as ‘news’ for the rest of 2022, because home sales in 2021 were the highest ever in Canada. .The Canadian Real Estate Association (CREA) expects a sales decline in its latest look ahead..“Some 568,288 properties are forecast to trade hands in 2022 — a decline of 14.7% from the 2021 record but still the second-highest annual figure ever,” says Shaun Cathcart, CREA’s senior economist. “With conditions in the market changing rapidly, this is a considerable downward revision from the previous forecast published in March,” — before the bank got really aggressive..“Only Alberta and Newfoundland and Labrador are forecast to buck the trend of falling sales in 2022.”.Permission to use an analogy: It’s like coasting down the Trans-Canada Highway at the posted speed of 110 k/h. Suddenly a bunch of cars doing 120 are passing you, so you speed up to keep pace with them only to have cars passing you at 130. Up to 130 you go and then 135, maybe 140, just to keep up. Until you see ahead cars are pulled over, getting ticketed by the Mounties. .All the drivers see what’s happening and immediately brake to the posted 110, which is normal..The ‘speeders’ are the buyers who took advantage of record low mortgage rates, seeing high-volume home sales and jumping into the market just to keep up..The ‘Mounties’ are the Bank of Canada saying “whoa,” time to slow things down..The bank has two targets when it comes to housing: slowing sales, which is happening, and stabilizing and lowering prices, which will happen..Prices, not sales, are the key numbers to watch — the main point in the story I reference above, which highlighted the stress test and Canada Mortgage and Housing Corporation’s mortgage insurance..Another analogy: Air force fighter pilots fly at tremendous speeds at very high altitudes. There’s a small chance of a crash, but if the pilot loses control, he or she has parachutes to bring them safely back to earth..In the event of major price declines in housing markets, the stress test and the insurance act as parachutes..Price increases are moderating, says Cathcart..“Prices have been halted in their tracks following a record-setting five months of growth between October 2021 and February 2022,” he says. “A critical element has been the impact that discounted five-year fixed mortgage interest rate levels have had on the stress test. In April 2022, discounted five-year fixed-rates increased from the low 3% range to the low 4% range.”.“The stress test is the higher of 5.25%, or the contract rate plus 2%. For fixed-rate borrowers, qualifying for the stress test has moved from 5.25% to the low 6% range. Variable rates will now be playing catch-up over the balance of 2022.”.Cathcart predicts the national average home price to rise by 10.8% on an annual basis to $762,386 in 2022. Price gains are forecast to be largest in the Maritime provinces, followed by Ontario and Quebec..“National home sales are forecast to edge back a further 2.8% to 552,403 units in 2023,” he says. “The national average home price is forecast to rise by a modest 3.1% on an annual basis to $786,282 in 2023.”.A caveat: The national average price is distorted by the prices in the Toronto and Vancouver areas. The national average also does not take into account the price ranges of the different types of homes that are selling..Lower average prices will partly arise due to buyers choosing less expensive homes, plus the Bank of Canada rate, which may have already had an effect..“The Bank of Canada is expected to get to somewhere in the 3.5% range on the overnight rate by their last meeting of 2022,” says Cathcart. “They’re only at 1.5% now and they only have four announcements to go. A 75-basis point hike in July is pretty much baked in at this point.”.Five-year fixed-rate mortgages have already had that increase, for the most part, priced in, says Cathcart..“It’s good because it means five-year rates won’t jump by another 2% as the Bank of Canada does its thing over the remainder of 2022. However, it’s bad if you’re trying to negotiate a five-year mortgage rate compared to just a few months ago,” he says..“Ultimately what we’re seeing in mortgages, and by extension, housing markets, is what has been expected and forecast for some time: higher rates leading to a slowdown to more normal levels of sales activity and a flattening out of prices.”
Responding to a story I wrote saying the sky is not falling on Canadian real estate markets, an astute Western Standard reader disagreed, pointing out sales in Vancouver are down 35%, year-over-year..Large declines in sales, year-over-year, in markets across the country should not be treated as ‘news’ for the rest of 2022, because home sales in 2021 were the highest ever in Canada. .The Canadian Real Estate Association (CREA) expects a sales decline in its latest look ahead..“Some 568,288 properties are forecast to trade hands in 2022 — a decline of 14.7% from the 2021 record but still the second-highest annual figure ever,” says Shaun Cathcart, CREA’s senior economist. “With conditions in the market changing rapidly, this is a considerable downward revision from the previous forecast published in March,” — before the bank got really aggressive..“Only Alberta and Newfoundland and Labrador are forecast to buck the trend of falling sales in 2022.”.Permission to use an analogy: It’s like coasting down the Trans-Canada Highway at the posted speed of 110 k/h. Suddenly a bunch of cars doing 120 are passing you, so you speed up to keep pace with them only to have cars passing you at 130. Up to 130 you go and then 135, maybe 140, just to keep up. Until you see ahead cars are pulled over, getting ticketed by the Mounties. .All the drivers see what’s happening and immediately brake to the posted 110, which is normal..The ‘speeders’ are the buyers who took advantage of record low mortgage rates, seeing high-volume home sales and jumping into the market just to keep up..The ‘Mounties’ are the Bank of Canada saying “whoa,” time to slow things down..The bank has two targets when it comes to housing: slowing sales, which is happening, and stabilizing and lowering prices, which will happen..Prices, not sales, are the key numbers to watch — the main point in the story I reference above, which highlighted the stress test and Canada Mortgage and Housing Corporation’s mortgage insurance..Another analogy: Air force fighter pilots fly at tremendous speeds at very high altitudes. There’s a small chance of a crash, but if the pilot loses control, he or she has parachutes to bring them safely back to earth..In the event of major price declines in housing markets, the stress test and the insurance act as parachutes..Price increases are moderating, says Cathcart..“Prices have been halted in their tracks following a record-setting five months of growth between October 2021 and February 2022,” he says. “A critical element has been the impact that discounted five-year fixed mortgage interest rate levels have had on the stress test. In April 2022, discounted five-year fixed-rates increased from the low 3% range to the low 4% range.”.“The stress test is the higher of 5.25%, or the contract rate plus 2%. For fixed-rate borrowers, qualifying for the stress test has moved from 5.25% to the low 6% range. Variable rates will now be playing catch-up over the balance of 2022.”.Cathcart predicts the national average home price to rise by 10.8% on an annual basis to $762,386 in 2022. Price gains are forecast to be largest in the Maritime provinces, followed by Ontario and Quebec..“National home sales are forecast to edge back a further 2.8% to 552,403 units in 2023,” he says. “The national average home price is forecast to rise by a modest 3.1% on an annual basis to $786,282 in 2023.”.A caveat: The national average price is distorted by the prices in the Toronto and Vancouver areas. The national average also does not take into account the price ranges of the different types of homes that are selling..Lower average prices will partly arise due to buyers choosing less expensive homes, plus the Bank of Canada rate, which may have already had an effect..“The Bank of Canada is expected to get to somewhere in the 3.5% range on the overnight rate by their last meeting of 2022,” says Cathcart. “They’re only at 1.5% now and they only have four announcements to go. A 75-basis point hike in July is pretty much baked in at this point.”.Five-year fixed-rate mortgages have already had that increase, for the most part, priced in, says Cathcart..“It’s good because it means five-year rates won’t jump by another 2% as the Bank of Canada does its thing over the remainder of 2022. However, it’s bad if you’re trying to negotiate a five-year mortgage rate compared to just a few months ago,” he says..“Ultimately what we’re seeing in mortgages, and by extension, housing markets, is what has been expected and forecast for some time: higher rates leading to a slowdown to more normal levels of sales activity and a flattening out of prices.”
