Industry experts will tell you we’re in the midst of the housing market ‘correction’ that has been foreseen for some time now, but they will also tell you that no matter how much the market corrects real estate is still going to be by and large unaffordable for a lot of people. This will be especially true for popular metro areas in and around Toronto and Vancouver especially. Many seniors today were lucky to be able buy their first home with a very reasonable mortgage, but the high prices attached to residential real estate today don’t allow for that.

Remax Canada’s 2022 Housing Affordability Report was put out on Wednesday of last week. Among findings were survey results that ever greater numbers of Canadians would now be more open to relocating to a different city or town. Of the 1,500 or so respondents, most said they would make the move if they felt they needed to buy a home, but many also said they would continue to rent until they were able to buy a home. That of course comes with their having concerns about rising rental rates in these same densely-populated metro areas.

This potential trend of more people considering living where housing is more affordable can have benefits of course, and looking at it from the angle of working as real estate agent working in these locations it can be a potential uptick in business as well as in the values of homes there for locals who might consider putting their home on the market or downsizing into a smaller home for retirement. Here at Real Estate leads our online real estate lead generation system is excellent for being first in-touch with potential clients, and that may be even more true now for mid-sized cities in Canada.

Back to topic, the Report also found that respondents might consider co-owning with friends or family or renting part of their home for additional income.

Make Move

For some people work or study doesn’t allow them to have the choice of moving out of the big city, and that’s fair enough. But for those who can it’s increasingly a smart choice. But for most they would prefer to not move too far. 64% of respondents would be willing to relocate to find a more affordable home, but 50% would not go further than 100km from where they currently live. About 40% said that moving to different city or province would also be an option.

This report also indicates Canadians are also weight buying a new home amid rising interest rates, which may cool record-high inflation but are resulting in increased mortgage rates. 68% replied saying they won’t be able to afford to buy a home where they’d like to live over the next 6 months, and 63% said higher interest rates may have them delaying their purchases.

There are economists who believe Canada may be entering a recession, and 57% of those same survey respondents said they are going to hold off on purchasing a new home or sell their existing one until stabilization returns to the economy.

Most Affordable Spots

Currently Brandon is the most affordable housing market in the country and coming in with a $310,252 average sale price for 2022. The remainder of the top 5 are Regina, St. Johns, Moncton and Red Deer. As for the most expensive, you can almost surely guess. The average price in Vancouver is $1.31 million and for Toronto it is $1.257 million. This comes following the Royal LePage House Price Survey last week has a new national market forecast for 2022 with projected growth now at 5% rather than 15%.

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Though some may be skeptical, there is absolute economic soundness to the argument that interest rate hikes are necessary to put the brakes on inflation. It’s not the first time this has happened in Canada, although it is the first time it’s occurred in the wake of a Federal Government being loose and carefree with money in a way never seen before in this country. That part of it is what it is though, and it should be noted that Canada joins nearly ever First-World country in struggling with inflation at this time. So while there is little to like about rate hikes in the here and now, the fact is they are necessary.

Part of the ‘little to like’ will obviously relate to certain aspects of the housing market in Canada, and it appears that is now especially true for the condo market in the GTA. Is that because many condos are owned by investors who paid too much for them? Yes, there’s some of that in it but it is more complicated than that. Keep in mind that condos have long been the standard for people buying a first home for themselves, and the natural process is for that rung on the ladder to be vacated some years later and the situation repeats itself as a new generation of 1st-time homebuyers buy an affordable first home for themselves too.

What we have now is a scenario where rather than condos going onto the market – owned by investors or not – they are being retained (and perhaps even being rented for less) rather than being sold at a price where they wouldn’t have been worth the value the mortgage was negotiated for. The same can be said for other types of homes, but those other types of homes haven’t been filling a very specific part of what has been the organic process in this all for a long time. Here at Real Estate Leads our online real estate lead generation system is ideal for realtors who need an advantage during a time when fewer homes are going onto the market.

Swinging back on topic, what is to be made of how the BoC’s recent hike is continuing to have major ramifications for the Greater Toronto Area condo market.

Pushing Down Prices

The rise from the BoC this week was 2.25%, and the rise is reverberating across the region’s housing sector, with the most notable effect being condo prices dropping significantly. The issue with this of course is the fact the condo prices were the ones to rise most dramatically over the last years after those for single-family detached homes. But the difference is A) there are many more condos on the market at all times, and B) these are the homes that the majority of 1st-time homebuyers would have seen as affordable, all things considered.

That may still be the case, but a rate rise of this size and promised ones in the future are really putting a damper on the market, as fewer would-be buyers qualify for a mortgage and the owners of condos increasingly decide now is not the time to sell. It goes without saying that inventory is absolutely key to regulating prices organically for all types of homes, but it is an especially sensitive issue with condos and even more of a focus in desirable locations like Toronto and Vancouver.

12% Decline Since March

The current median per-sq ft price for condos is $832, and that works out to a 12% drop since March of this year. The estimation is now that individuals buying condos here are paying an average of 1% below asking, and as we all know paying below asking for any type of property has been simply unheard of for a very long time now. Look no further than just a handful of months back in Feb 2022 when homebuyers were paying on average 15% above the listed price for condos in the GTA.

Now we have inventory plateauing there too, and of course what that works out to is a buyer’s market. Some will welcome the opposite end of the spectrum there based on the fact it’s been the opposite for so long, but balance is always best and a healthy housing market is never one that leans too far towards being a buyer’s market. That’s the basic economics of it, and that takes into consideration the additional value that everyone has in their homes, including those who haven’t bought theirs yet.

Supply Down in City’s Core

The trend of people returning to the city core as back-to-work trends continue means that supply is down in the city’s core, and that means that the average price per square foot has increased every so slightly as people come back to downtown Toronto. The average price of a condo in downtown Toronto is now $1,102 per square foot—a $3 increase so far in July—or roughly $882,680.

But with rents skyrocketing and not coming down in step with price values going lower, we have a situation where would-be sellers who don’t like what they see are relisting their condos on the rental market instead. A recent spike in terminated listings may be explained by this. The average lease price for a condo is currently $2,700 per month, and that’s up 15% from last year.

Fierceness in the rental market, and the reason it doesn’t move with home value decreases, comes back to supply and demand exclusively. With that in mind, realtors can advise clients that despite the downturn if a property is well maintained, well located, and priced competitively it will still sell and likely relatively quickly in places like Toronto and Vancouver. The same cannot necessarily be said for other types of homes, but condos are unique in what they offer at or around a certain price point.

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The long-forecasted ‘correction’ in the Canadian real estate market is here now, and as is always the case some are better situated to be weathering it than other. Many have predicted – accurately – that it is going to those who have large amounts of money invested in housing AND those who overleveraged themselves to buy homes recently who are most likely to feel the pinch. That’s a reflection of the fact that there certainly are negative aspects that come along with the positive one. That being that homes are more normally priced for people who need a place to live.

So there will always be people with interests on either side of this, along with others who have some skin in the game based on how the make a living for themselves. When house values drop dramatically over a short period of time there are definitely aftershocks that rumble through different communities. For real estate agents in Canada the biggest part of the drawback of seeing this happen is that many homes that would have gone onto the market are now held off it, at least for now while prices are lower. This can mean fewer new clientele of both buyers and sellers, but here at Real Estate Leads our online real estate lead generation service is an excellent way to counter this trend.

We’ll leave that there for now though, and instead return to focusing on the market downturn for real estate in Canada. There are experts that are saying that Canada is the country that is going to be most affected by it, and that doesn’t bode well for many of the same people we’ve talked about above here. Let’s take our entry this week and have a deeper look into this and what it might mean for home and property owners here.

Attributable to Canada’ Extreme Price Boom

All of this comes from Goldman Sachs latest publishing on rising interest rates around the world. The BoC actually raised ours again today, and further rises are expected throughout the remainder of 2022. The very low rates we’ve seen over past decades now have stimulated record home sales and a multi-decade high for inflation. But the exact opposite is happening now and it’s removing home buyer stimulus. Home price declines are now expected across most advanced economies but Canada is expected to have the sharpest drops, and that’s because of the extreme price boom it has seen since 2018 and one that up until now had many homeowners decidedly pleased.

We are seeing rising mortgage rates in the US, Canada, the UK, and New Zealand and they are definitely cooling home sales already. The US has had a major drop themselves – around 40% nationally and again even higher rates are on the horizon and expected to slow housing even further.

Falling home sales nearly always mean falling home prices, but not all places adhere to this trend. We are also seeing that home prices are still rising in the US, Germany, and the UK. But when all of this becomes problematic is when home sales fall much faster than inventory, and this is what we are seeing in Sweden, Australia, and – most prominently – Canada.

Another notable trend that is unique to Canada among all these countries is that house prices have fallen the most in areas that had the most growth early in the pandemic.

Biggest Drop

Industry experts foresee a modest drop for home prices over the next couple of years, but Canada is expected to see the biggest drop as real home prices will likely fall up to around 12%. France – 9%, the US – 3%. Keep in mind with national prices it is the inflated markets where bigger declines will be soon. The biggest takeaway for readers here can be this; The slowdown will be sharpest in Canada and this is the result of weak recent momentum, continuing low affordability, and rapid policy hikes by the Bank of Canada

Having a tight housing market may counter this trend somewhat and prevent a full-on slump, but the rapid deterioration in affordability and large drops in home sales paints a picture where a major housing downturn is on the immediate horizon.

Worst Housing Affordability for Advanced Economies

It is this deterioration and ongoing lack of affordability that is going to be what keeps buyers from jumping in until home prices decline. Looking back to early 2020 there was brief surge in affordability at the start of the pandemic, and that is obviously due to rates being cut lower at that time. What happens here is an age-old economic equation, with affordability eroding rapidly as the market adjusts to absorb the increased credit capacity. This is why low rates and the increased market activity caused by it haven’t improved affordability, and won’t anytime in the future either.

Here’s what we do know; low rates produce housing bubbles in advanced economies. But when you add monetary policy errors to the mix in certain advanced economies, the negative affects of higher rates are amplified big time. This is what we are beginning to see here in Canada and it will be and interesting yet anxious time for many as they wait out this storm.

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Readvanceable Mortgage Option Failure Advances Risk for Over-Leveraged Homeowners

Even if you are not a savvy real estate investor you likely what the term ‘underwater’ means when it applies to someone who has recently made the decision to pay more than they likely should have when buying a home. There is risk to everything in life, but there have been literally hundreds of economists over the years who have been saying it is very much buyer beware given the fact that the market must eventually home values come down. A buyer will be underwater if they owe more on their new home than the home is worth, and that’s a very real concern with what is happening now in Canada.

The potential problem is very acute in the markets that always make the news, and that’s in the big metro areas where housing has been crazily in demand for a long time like Toronto and Vancouver areas. FOMO is the acronym for Fear of Missing Out, and this is what spurred so many recent homebuyers to make the choice they did and pay more than a home should be worth. It’s the fear that this would be their only chance to get in, and for what it’s worth this has been a profound trend in many other countries around the world over the last few years.

The agents that work with both homebuyers and home sellers need to be attuned to these trends, and as has been the case with every market cooling period ever seen there are fewer homes going onto the market too. Perfectly reasonable if you’re a homeowner who doesn’t absolutely need to sell at this time, but what it does is mean less of the proverbial pie to go around. If you’re a newer realtor you may need help gaining clientele, and it’s true that our online real estate lead generator here at Real Estate Leads is ideal for that.

But staying on topic track here, there was a recent proposal for a new mortgage product that might have helped over-leveraged buyers, but the Feds have made sure that went nowhere and we thought it might be helpful to provide an overview on it, and what might have been.

Combo Mortgage Product

So what exactly would a readvanceable mortgage be, and why did it get shot down?. It was one that combine a traditional mortgage with a revolving line of credit. As the homeowner paid down the principal, it would increase in size. The benefit would be in allowing them to immediately re-borrow, and do so even when the total loan goes past the 65% limit of the appraised value of the home.

Further, if that is to also include the amortized portion then homeowners would have been able to borrow as much as 80% of the value of their homes. The only caveat being that the amount would be minus any outstanding debt on the original mortgage. Sounds fairly reasonable, no? The only immediately apparent obstacle would be the risk of having homeowners in persistent debt.

That would certainly be the case if it required borrowers to pay both the principal and interest on any combined loan amount above 65% of the home’s value, and it’s here where the wheels started to fall off this proposal and reason #1 it was rejected at the Federal level.

Other Contributing Factors

Being able to borrow up to 80% of the value of homes by using advanceable mortgages repeatedly was certainly going to appeal to homeowners for any number of reasons, not the least of which would be the ability to buy additional properties and then either rent the unaffordable home OR sell it when the time is right.

Yes, a HELOC (home equity line of credit) accomplishes much the same, but the difference is immediately apparent because the owners would be forwarding their mortgage rather than borrowing against the equity in their home – something recent homebuyers likely wouldn’t have much of anyways.

But as it stands now here we are with the Bank of Canada aggressively increasing its benchmark interest rate to combat inflation, and the result being Canadians who continue to tap into their homes for cash could be left owning a small portion of their property when all is said and done.

Also factoring in here is how higher borrowing rates have put the housing market into a near freeze and house values are going down, considerably in some regions. Technically, lenders could require partial repayment if a newly-appraised house falls below the required value to cover the amount owed.

Last but not least, readvanceable mortgages might have been a good fit for those who have been damaged by making poor choices with their HELOC. Not the focus here for sure, but something that needs to be kept in mind. There certainly is merit to what the Federal Government has done here based on the unsteadiness of the move, but there needs to be an ongoing conversation about what sort of options might exist for people who have over-extended themselves buying a house.

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It’s an excellent way to supercharge your client prospecting efforts, and it’s highly recommended with the competitive nature of the real estate business in Canada.