Essential Knowledge Series
The Canadian real estate market has been a topic of discussion for quite some time. With house prices recently reaching unprecedented heights, many were wondering whether the market has hit its peak or whether prices will continue to rise.
Despite record highs, the real estate market has been impacted in the past 12 months by a number of other factors, including mortgage rates, affordability, and immigration. In this article, we'll take a closer look at the current state of the Canadian real estate market and explore some of the key trends and factors that are shaping the market.
Real Estate House Prices: Is This The Bottom?
According to a recent article in the Toronto Star, Toronto's real estate market may have hit its price floor. With a low inventory of homes for sale and high demand from buyers, bidding wars have become more common, driving prices up.
The article notes that Toronto's housing market has been relatively stable in recent years, with prices increasing slowly but steadily. However, the COVID-19 pandemic and its associated economic impacts caused a dip in the market when interest rates rose due to inflation, with prices falling by an average of 10-15%.
But now, as the city begins to emerge from the pandemic and the economy starts to recover, the real estate market appears to be bouncing back. The low inventory of homes for sale is creating a seller's market, where buyers are competing for a limited number of properties, driving prices up.
The article cites several examples of bidding wars in Toronto, including a recent sale of a semi-detached home in the east end that received 23 offers and sold for $400,000 over the asking price.
This trend is not unique to Toronto. Across Canada, many cities are experiencing similar housing market conditions, with low inventory and high demand leading to bidding wars and price increases.
While this may be good news for homeowners looking to sell, it can be challenging for buyers, particularly first-time homebuyers, who may struggle to compete with more experienced buyers with larger budgets. Buyers may need to be prepared to act quickly and make competitive offers to secure a property in today's market.
Canadian real estate markets appear to have hit their price floor, with low inventory and high demand leading to bidding wars and price increases. While this may be good news for sellers, it can be challenging for buyers, particularly first-time homebuyers. The long-term effects of the pandemic on the housing market remain uncertain, but for now, Toronto's real estate market seems to be bouncing back. Generally speaking, many of the major cities in Canada follow a similar trend to Toronto so it's a good indicator of things to come.
All in all, the worst may be over for Toronto's real estate market and prices are likely to continue rising in the coming months. However, the long-term effects of the pandemic on the economy and the housing market remain to be seen, and it's possible that there could be further disruptions in the future.
Mortgage Rates: A Key Driver of the Real Estate Market
One of the key drivers of the Canadian real estate market is mortgage rates. When mortgage rates are low, buyers are more likely to enter the market, as they are able to afford larger mortgages with lower monthly payments. Conversely, when mortgage rates are high, buyers are less likely to enter the market as the cost of borrowing becomes more expensive.
At present, mortgage rates in Canada remain relatively low. Although the recent increase in mortgage rates to the 5-6% range seems drastic, rates in the 1970-1980s were in the 20% range. Of course, house prices were a lot lower at that time, so it's not a direct comparison, but it's still important for context.
Mortgage rates have increased due to concerns over inflation. As the economy slows and people spend less, inflation is likely to continue falling. To prevent inflation from getting out of control, the Bank of Canada has raised interest rates, and so far, it seems to be working. Inflation has decreased to 4.3% from a high of 8.1% in June of 2022. If this trend continues, Canada could see interest rates decrease sooner than expected. Until then, interest rates remain high for today's house prices.
Higher interest rates significantly impact the real estate market, as higher mortgage rates make it more difficult for buyers to enter the market. So far, it has led to a slowdown in housing construction and renovation, as higher borrowing costs make it less attractive for homeowners to take out mortgages.
We've already noticed a slowdown in home sales year over year in Canada and many of the major cities. According to HouseSigma, house prices in Toronto went from a median price of $1,097,000 to $1,015,000 from April 2022 to April 2023. A 7.47% drop. However, with interest rates beginning to hold steady, there could be a rally in house prices in the coming months. Over the past 5 months, the GTA has seen the median house price increase from $885,000 to $1,015,000. A 14.68% increase!
Affordability: A Growing Concern
According to a new report from the Canadian Mortgage and Housing Corporation (CMHC), the number of high-risk mortgages has more than doubled in the past year. The report states that these high-risk mortgages, which are loans that are granted to high loan-to-value purchases, borrowers with poor credit or high debt levels, are a significant concern for the housing market.
CMHC found that these high-risk mortgages are most prevalent in Ontario, British Columbia, and Quebec. Homeowners who are unable to make their mortgage payments may be forced to sell their homes, which could lead to a surge in the number of homes on the market and a potential drop in house prices.
This increase in high-risk mortgages could also have wider implications for the Canadian economy. As more homeowners struggle to make their mortgage payments, there may be an increase in the number of foreclosures, which could have a ripple effect on the overall housing market.
The rise in high-risk mortgages may be a result of the COVID-19 pandemic and its associated economic impacts, such as real estate price surges. It's unclear how long these trends will last, and the recent price decreases in 2022 and now increases in 2023 make the housing market difficult to predict.
Overall, the rise in high-risk mortgages is a cause for concern for the housing market and the Canadian economy as a whole. Homeowners who are struggling to make their mortgage payments may be forced to sell their homes, which could lead to a surge in the number of homes on the market and a potential drop in house prices.
Immigration and Its Effects on Real Estate Prices
A recent article in the Financial Post discusses how Prime Minister Justin Trudeau's immigration policies could exacerbate Canada's affordable housing crisis. The article cites a report by the C.D. Howe Institute, which suggests that increasing immigration levels could put additional pressure on Canada's already strained housing market.
The report notes that while immigration is generally seen as a positive force for the Canadian economy, it can also lead to higher demand for housing. With a limited supply of homes available, this increased demand could lead to higher real estate prices, making it even more difficult for Canadians to afford a home.
Canada's housing market is already experiencing affordability challenges, with many Canadians struggling to find affordable housing in major cities like Toronto and Vancouver. The C.D. Howe report suggests that increasing immigration levels could worsen this situation, making it even more difficult for Canadians to enter the housing market.
Prime Minister Trudeau has promised to increase Canada's immigration levels in the coming years, with a goal of welcoming more than 1.2 million new immigrants between 2021 and 2023. While this increase in immigration could have many positive economic impacts, it could also put additional strain on Canada's housing market.
The article suggests that policymakers will need to take action to address Canada's affordable housing crisis, regardless of immigration levels. Some potential solutions include increasing the supply of affordable housing, implementing policies to deter foreign buyers, and providing incentives for developers to build affordable housing.
This information highlights the potential impact of immigration on Canada's housing market and the need for policymakers to take action to address affordability challenges. While immigration is generally seen as a positive force for the Canadian economy, it's important to consider how it may affect the existing Canadians, real estate, and housing markets and take steps to ensure that all Canadians have access to affordable housing.
Mortgages: An Essential Tool for Homebuyers
Despite the challenges facing the real estate market, mortgages remain an essential tool for homebuyers. Mortgages allow buyers to purchase homes that they might not otherwise be able to afford by spreading out the cost of the home over a longer period of time.
In Canada, there are a number of different types of mortgages available to homebuyers. The most common type is the fixed-rate mortgage, which has a set interest rate for the life of the mortgage. This provides stability and predictability for homebuyers, as they know exactly what their monthly mortgage payments will be.
Another type of mortgage is the variable-rate mortgage, which has an interest rate that can fluctuate over time. This type of mortgage is typically tied to the Bank of Canada's prime rate and can be more affordable in the short term. However, variable-rate mortgages can be risky, as rising interest rates can cause monthly mortgage payments to increase.
Homeowners will need to assess their situation carefully to determine what type of mortgage is right for them and what is the lowest risk for their current situation. If you have questions about mortgages, check out our frequently asked questions download below. Absolutely free!
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Going Forward in 2023
Canadian real estate is a complex and dynamic system shaped by a wide range of factors, including house prices, mortgage rates, affordability, and immigration. While there are signs that the market may be cooling off, there are also signs that the real estate market could begin to increase in the Spring market and for the remainder of 2023 because of the low supply of houses.
In summary, looking at a combination of the topics mentioned in this article will give you a good idea of where home prices are headed. If interest rates remain the same, immigration increases, supply remains low, and demand remains high, chances are home prices are going to continue to increase.
However, the opposite is also true, if interest rates continue to rise, foreclosures start to happen more, supply increases and demand decreases, home prices are likely to come down.
Regardless of what happens, it's important to remember to purchase a home for you and your family that is suitable to your situation. At the end of the day, no one has a crystal ball, so you need to do what is best for you and your family.
If you're a home buyer who is struggling because of the inflated Canadian home prices, I'll leave you with this quote. "The only guarantee for failure is to stop trying."
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