Canadian property markets nearing tipping point
Over the past year, there have been changes in the Canadian real estate market. Prices started to decline in the spring of 2022 and kept declining through January 2023. Due to the supply being constrained, prices have begun to rise during the last two months. Despite this, purchases and demand are still at record lows. High mortgage rates have wiped out demand. Rates are not anticipated to dramatically decline until 2024, which is unfortunate for potential buyers who are already having difficulty finding affordable housing. For purchasers who are constrained for cash, there might be a bright spot.
The unwillingness of prospective sellers to put their properties on the market is one of the main causes of the restricted supply in the Canadian real estate market. Prices in most areas of Canada are currently 10 to 20 per cent below the peak, so many sellers are waiting in the hopes that prices will recover before listing their homes. This means that the supply of available properties is constrained, which in turn is driving up prices for those that are available.
The tricky part is that high mortgage rates continue to put downward pressure on prices and while sellers have succeeded in turning prices upward, only a small share of sellers can benefit. If all potential sellers return to the market to cash in their price gains, it would likely lead to an oversupply of listings. In such a scenario, we could see up to six months of listings hit the market all at once, which would have a significant impact on the market.
Demand Drivers
One key reason demand is currently depressed in the Canadian real estate market is the high mortgage rates. Prospective buyers can not qualify for the large mortgages that were available a year ago so they are finding it difficult to afford homes at current prices.
Affordability is about as bad as it was in the 1980s when mortgage rate were 12 to 18%!
With a significant share of potential buyers priced out of the market, demand for properties has withered. Unfortunately, rates are not expected to drop significantly until 2024, so this situation will likely persist for some time.
As well, confidence in real estate as an investment has been shaken by the recent volatility. Only 30 per cent of Canadians believe property prices will be higher in September.
Despite the current challenges in the Canadian real estate market, there are some positive signs. For example, some regions are seeing an uptick in demand in both major urban centres and smaller cities. After 6 to 8 months of falling prices, a 2-month uptick isn’t enough of a trend to call this the end of a bear market.
It's clear that the Canadian real estate market is facing significant challenges at the moment. Limited supply and high mortgage rates are all contributing to a difficult market for buyers, while potential sellers are also facing challenges in deciding when to list their properties.
As we look to the future, it's clear that the Canadian real estate market will continue to be a topic of interest and concern for many people, and it will be important to closely monitor developments in the coming months and years.
