Before anyone is quick to jump on the word debt and chastise anyone for their lack of financial smarts, there are very few if any of us who pay the entire price for a home all at once and immediately after purchasing it. Those folks are out there, but the vast majority of us will take on a mortgage to pay for our homes. Is that a much riskier move than ever before though? You could certainly make the case for that with ongoing rises to the BoC’s interest rate and then how median home prices have been falling recently. But people need places to live, and that’s a permanent reality.

So when we look at Canadian mortgage debt as its own entity, any staggering number figures need to be understood in the context of the many hundreds of thousands who own a home but don’t own it in its entirety yet. We’ve talked about how fewer homes are going onto the market all across Canada these days because lowered values mean owners who can wait for the pendulum to swing the other way are doing just that. That is paired with more demand than ever though, and so it’s not an ideal situation.

The Bank of Canada has recently announced that outstanding mortgage credit reached a new high earlier this summer, and one thing that is also true about interest rate hike is that they shrink borrowing capacity at the same time. Though it’s not a major one, this factor is among many that may be making it difficult for people working in real estate as compared to years previous. If that’s true of you and working as a realtor then our online real estate lead generation system here at Real Estate Leads is certainly something you should consider.

Let’s look at this high consumer mortgage debt in more detail, because it does factor into whether or not people are willing to move forward with buying a home.

Trillion Mark X 2

What we’re looking at here is how higher interest rates are throttling industry growth, and watching as borrowing credit capacity shrinks alongside it. In addition, annual growth is still at a positive level despite the increase in personal mortgage debt we’re evaluating here. The balance of outstanding residential mortgage credit hit $2.04 trillion in July of this year, an increase of 0.6% working out to a valuation of $12.1 billion for the month.

This mortgage debt is $174.7 billion (9.3% yearly increase) larger than it was for summer 2021. As mentioned it’s a record and it is huge growth indeed, but things are slowing down. Gradually, but mortgage debt is not growing as quickly as it was. The consensus is that it is an unusually slow rate.

We see as well that the 0.6% growth in July was the smallest since February, and it is a part of the year where we rarely ever see high sales volumes. In fact, it was unusually slow for any July. Going back to 2022 there have only been 2 years where there’s been less than 0.6% growth.

Growth is still brisk overall though, even as borrowing costs rise. July had the slowest annual growth since May 2021, and that when the mid-pandemic sales boom really picked up steam. It’s down from the February 2022 peak of 10.8%, but it’s still noticeably high.

Canadian Mortgage Rate Credit Going Up

2009 was the last time annual growth was up to this extent, and even then the duration of it was only a little more than a month. Mortgage credit growing at this rate has only occurred prior to recessions in any other instance than that one, and yet here we are the possibility of a recession in the not-too-distant future.

It’s clear that rising rates are putting something of a brake on Canadian mortgage credit, and the workings of that are fairly obvious. It’s fair to say the impact of the full slowdown won’t be seen until later this year, and the fact that many homebuyers aren’t borrowing at the latest rates and instead secured ones any number of months earlier in the year. Once interest rates and inflation stabilize, we should have a clearer idea of how much of an impact these rising rates will have.

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What’s news in Canadian Real Estate these days is seemingly nothing but a continuation of what’s been news for the past 7 months or so. That being a progression from the market being in a lull, to it being so profoundly cooled by dropping median home values and meteoric losses in the value of investments in Real Estate. Yes, that is not necessarily a bad thing and there will be more affordable homes available, but as we always preach you don’t want to be going to either extreme end of the spectrum when it comes to home values.

So here we are with the CREA (Canadian Real Estate Association) reducing its forecast for home sales this year and lowering its expectations for price growth. BC for example has had some of the hottest real estate in the country for decades but as of now the BC home sales forecast is set to go down by about 34% this year and is foreseen to be going even lower through 2023. Having much the same thing happening elsewhere in the country – although maybe not to the same extent – is going to have all sorts of ramifications and more than a few of them are being felt already.

One of which of course is fewer homes going onto the market and owners decide now is not the time to sell, and there’s always a trickle-down effect with that. It may mean that some of the homes that do go onto the market are more hotly contested and sell for over asking. That may be of great benefit to that listing realtors, but there will be fewer listings to be had in general for the rest of them and that is what makes our online real estate lead generation system here at Real Estate Leads such a good choice. It can counter that downturn by putting you immediately in touch with potential clients.

But enough about that for now, what we’ll do instead is swing back onto our topic for this week’s entry and go into more detail about how things are not so good with the drop in homes and home values.

20% Fewer Home Sale Transactions

The CREAS foresees 532,545 properties will have changed hands in Canada once this year is done, and if so that will be a 20% decrease from the 2021 annual record. A similar forecast is for national average home prices is rising by 4.7% to $720,255. All of this is against the backdrop of their June forecast where a 14.7% decline in sales and a 10.8% increase in the national home price was predicted. Then just last month (August) it was reported how home sales had gone down just 1 percent since July but were 24.7% lower than they were for August 2021.

The only other upside there might be how the national home price has gone (from $637K+ in August ’22) but if homes aren’t being sold it can and will be tempering that enthusiasm seen in everyone in the industry. We did see national sales hold steady month-to-month for the first time in August since February, and with that paired with stabilization of demand/supply conditions in many markets there can be at least some hope that this trend is near running its course.

But in many markets, and Toronto being one, housing conditions have cooled in the last few months as climbing interest and mortgage rates suppressed sales activity and started to affect prices. One undeniable good from all of it is in the way interest rate hikes have made bidding wars much less savage and there is more reason for would-be buyers to be waiting on even further price drops.

Concern Around Falling Home Values

The biggest issue when it comes to the average homebuyer is how falling home values are creating real concern for people who bought home and took on mortgages based on the value of a home that doesn’t exist anymore. There are many of them who received their pre-approvals before the Bank of Canada’s tightening and are now facing the reality of their home having lost about 10 to 20% of its value and just shortly after they purchased it.

Enormous interest rate shock is being absorbed, and you need to go way back to the late 1980s to find the last time a similar one-year increase in the carrying cost of an average home purchase in Ontario was a reality. We likely haven’t begun to see the full ramifications of what is really the most pronounced tightening of housing conditions in a generation, but it is true that there truly are forces here that are beyond the control of the industry itself.

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Staggering numbers are just that, staggering numbers and surely you’ll all agree that 322 billion is a staggering number. Where that number comes from is that is the number in dollars by which real estate holdings are down in Canada, and given how much of our country’s GDP is in real estate this is not something that should be seen favourably by anybody. Even those who are keen to see lower prices for real estate as a means of their getting into the market.

What is happening here is the conflux of events that are related to the runaway inflation we’re seeing, both in Canada and all around the world. Interest rate hikes are threatening a lot of homeowners now with what it will take for them to be making their monthly mortgage payments, but as most of us will know these rate hikes are entirely essential to combat inflation as best as possible. Is it a lesson for people to not overextend themselves when buying real estate? Even if they did pass a mortgage stress test. Sure, but let’s not look past the fact that by and large this was an unforeseen development.

What happens when values decline in real estate is that the only people who are selling are usually those that need to sell. Yes, there will be exceptions to that but with real estate holdings down by this type of value there is going to be PLENTY of product held off the market when it would be there otherwise. This creates obvious challenges for people working as realtors who would otherwise be more engaged by clients on either end of the buying / selling spectrum.

Our online real estate lead generations system here at Real Estate Leads is an excellent way to counter the downturn and still generate new real estate business for yourself. But staying on topic let’s have a look at what is being said about this recently announced drop in real estate holdings value in Canada.

2^nd Quarter Plummet Continues

Canadian households saw a decline of almost C$1 trillion ($775 billion) in net worth in the 2^nd quarter of this year, and at the forefront of it all were plunging prices for homes and stocks. Further, the 3 months between April and June saw real estate holdings held by households plummet some $419 billion, and at the same time financial assets dropped by $531 billion. All of this and along with the numbers provided here was put out by Statistics Canada.

The next sobering statistic to go along with those is that household net worth dropped 6.1%, working out to about $990 billion. That’s the largest drop ever seen for this metric, and it should be plenty disturbing for anyone and not just those invested in real estate. If you don’t know why that is then you may not have the understanding of global economics that you might like to have. Here’s why.

Higher global interest rates are destroying household wealth in Canada, and providing a major stimulus that promotes Canada’s economy slowing even more than it has already. We currently have the average resale price of a home having gone down by 10.5% from the 1st quarter of this year. Again, when we consider the truth of what real estate means to our GDP, that’s not good for anybody.

Income Growth Lags

What economists foresee here is a drag on net worth from housing that is likely to persist into next year, with Canadian home prices continuing to fall and borrowing costs likely to go up further. It isn’t difficult to foresee all of this with the fact that the BoC has increased its policy interest rate by three-quarters of a percentage point to 3.25% recently, and they will almost certainly be doing it again next month and adding another half point. The rate was holding at an emergency low of 0.25% until March.

If there’s any good news in all of this it is that households remain much better off than they were before COVID, and a cumulative net worth that is $2.9 trillion higher than what was the case for the end 2019 attests to that. The value of residential real estate held by households has increased $2.3 trillion over that period too.

Last but not least, the household credit market debt as a proportion of disposable income increased to 181.7%, from 179.7% for Jan-March of this year.

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Declining home prices have been the trend for some time all across Canada, but to some extent the major metropolis regions with desirable living areas have been somewhat insulated against that, but with ‘somewhat’ being the operative word. Generally speaking the price declines in Vancouver and Toronto have still been quite profound and a cause for a variety of sentiments depending which end of the spectrum you’re on – homeowner or prospective homebuyer.

What we’re seeing is the trend is slowing to an extent, but with the BoC raising interest rates again recently any marked swing in the other direction simply isn’t going to happen. What we are seeing for the 2 biggest metro areas in Canada is that sales went up in August, but they’re still down from where they were at for Labour Day at the end of August / Early September 2021. Of course, the primary factor behind this is going to be that there is a large volume of homeowners who may be considering selling, but don’t absolutely have to sell at this time.

These homes will go on the market at a later date when median home values increase. This does equate to a good number of very desirable clientele not working with real estate agents like they might be if the market was still as hot as it was in preceding years. This may sting more for some realtors more than others, but here at Real Estate Leads our online real estate lead generation system is an excellent way to have the power of Internet Marketing countering the downswing and making it more likely that you can generate new clients at a time when they may be harder to come by.

Moving back to our topic here this week, let’s look at the workings on what’s going with Toronto real estate and the slight uptick in homes sales from July

Eased Prices from Winter

The TTRREB has put out their report showing August sales were down 34% from this time last year, but up almost 15% from July. This month-to-month increase is being attributed to buyers returning to the market to take advantage of prices that eased from winter’s elevated levels. Sales in Toronto for the month worked out to 5,627 compared to 8,549 last August and 4,900 for July 2022.

On the other side the 34% ear-over-year drop was a less drastic decline than the previous 4 months, and the belief in the industry and among local real estate pros is that we’re still bouncing around levels that only have the depth of the COVID shutdown and the 2009 financial crisis as comparable precedents. The region’s real estate market has cooled from the heated conditions seen in the early months of 2022. Climbing interest and mortgage rates in recent months have certainly suppressed sales activity and started to weigh on prices. On the plus side for buyers there are fewer bidding wars and prospective buyers are more able to sit on the sidelines and wait for price drops to come down even more.

8.9% Home Price Index Rise

Evaluating on a year-over-year basis, the home price index increased by 8.9% and the average selling price for all home types combined went up by 0.9% to $1,079,500. In comparison to July though, the index is quite a bit lower. $1,130,463 was the seasonally adjusted average selling price, and that works out to around 2% month-over-month, but down around 12% from $1,285,129, when the GTA experienced its highest average price of the last year.

Monthly growth see for the average price added to a dip in the index points to August having a greater share of more expensive home types sold. New listings for August worked out 10,537, a decrease of just 1% from August 2021 and its 10,615 sales. There is also definitely far fewer new listings coming onto the market.

An overarching belief around these numbers and the trend is that more and more prospecting buyers are becoming more comfortable with the new reality of the current cost of borrowing. They may have realized they’ve lost some degree of their buying power, but they’re re evaluating and making their home purchases differently as a result of it.

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