Canadian concerned about the affordability of the home they need for themselves number in the thousands, and that may well be the hundreds of thousands. Housing affordability and the scarcity of affordable housing is something being seen in nearly all 1st-World countries around the globe though, so it is certainly not unique to Canada. The scarcity of affordable housing has so many different factors contributing to it, but none if more relevant than the fact that there are more young people than ever coming into the stage of their lives where they’re ready to buy a home.

The problem is now that – for a whole set of other reasons – they’re not able to afford that home the same way previous generations could when they were the same age. Despite having the same education and earning potential levels. It’s not a good situation any way you slice it, but there’s also no immediate fix available for it. Housing demand WAY outstrips supply, and especially in major metro areas of the country where most the people see the jobs that fit their lives and a future for themselves.

Interest rate rises paired with more daunting mortgage rates mean that fewer people see themselves as potential homebuyers. That is not something they will want for themselves, and realtors who are looking for new homebuyer clientele or who have a client with a home that’s not selling won’t be pleased to hear that either. A cooling real estate market has it pluses, but for realtors it’s not ideal. However, our online real estate lead generation system here at Real Estate Leads can certainly help realtors who don’t have clientele to the extent they’d like.

Course Reversal

All of this may be becoming even more of an acute issue with news that the Government of Canada (GoC) 5-year bond yield hit a new multi-month high last week. What this means is that yields have reversed course now, and with economic data coming in much hotter than expected. This has the potential to drive home prices lower, but the competitive nature of credit markets means that Government bond yields influence interest on similar terms.

Before getting further into this, let’s preface a bit by looking at the 5-year GoC bond, one that directly influences the 5-year fixed rate mortgage and was the most popular mortgage product until recent record-low rates led to so many people opting to go with variable mortgages.

And so here we are now with Canadian bond yields having surged over the past few weeks, as inflation fails to cool as fast as economist hoped it would. The GoC 5-year bond closing at 3.54% on Feb 21, 2023 is a new high for this year and the highest since November of last year.

If this is indicative of a beginning trend then we may have a market shaping up with conditions seen around 2008, and if you’re reading this blog then you likely remember what happened then. The GoC 5-year bond rate may be going even higher too, as last week it moved up again

This is a big change from a few months ago, as up until 3 weeks ago, falling yields was all you would have heard of. The 5-year yield had fallen to just 2.8% in the middle of January ’23 but since then it has added 55 basis points and that is definitely a meteoric gain over such a short time.

Yields Higher & Home Prices Lower

As for what falling yields would mean with implications for the housing market, the rise in f5-year bond yields may have big implications for an already struggling housing market. We can see that even with the correction of the past year, home prices are still up 30% from pre -pandemic levels. While interest rates have been hiked again by the BoC recently, they did say they would put a pause on them.

But even if with a pause (and there’s not guarantee of it staying in place, with some economists saying that external price hiking may force their hand again) there are still relatively high rates making mortgages on still-overpriced homes that much more intimidating for would-be buyers. Higher mortgage rates will also mean fewer new build houses in the market, and with more potential buyers waiting for rates to cool down, house prices will very likely surge further with accumulated inflation on commodity prices and fewer new build houses available on the market.

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The prolonged dip that has been the defining characteristic for Canadian Real Estate over the last nearly 8 months continues unabated with news that 2023’s January was the worst January for home sales across the country in 14 years. Are fewer buyers putting homes on the market due to the prospect of not getting what they think they could or should be getting for them? Yes, that’s true, but what about increased demand meeting less supply to counter that in the way it should? Then there’s the factor of there being fewer home starts too.

All sorts of different factors have gone into what we are seeing now with regards to this drastic decline in the number of homes being sold. The other end of the spectrum has to be looked at too, as with interest rates being way up from this time last year there are going to be fewer buyers willing to make a move, even if they might well still be approved for the mortgage. And looking at the headline in greater detail, is this type of decline being seen in both Toronto and Vancouver regions too where relativity has to be a consideration given the way these markets have so much demand pushing sales ALL the time.

One thing that is certain with a downturn in homes sales is that some realtors will be feeling that pinch more than others. Fewer prospective homebuyers clients are going to be out there, so if you’re one of those realtors having more difficulty than usual with drumming up new clientele then our online real estate lead generation system here at Real Estate Leads is definitely something you will want to consider.

Back to topic, let’s look more into what’s fuelled this drastic downturn in sales that has made January 2023 such a noteworthy one for the fewest amount of sales in January since 2009.

Downs Countering Ups

Canada as-a-whole home sales for January 2023 were also down 37.1% compared to January 0222. This is as January sales also fell on a month-over-month basis, going down 3% compared with December and in large part neutralizing the small gains made in December. City-specific gains in Hamilton-Burlington, Ont., and Quebec City were more than offset by lower sales in Greater Vancouver, Victoria / Vancouver Island, Calgary, Edmonton and Montreal.

Fewer sellers of course means fewer options for buyers and properties in Greater Toronto Area suburbs like Mississauga and Ajax are still seeing multiple offers and buyers putting in bids that are above asking price. This of course goes hand in hand with many owners who believe that market has tanked and so selling our property right now isn’t in our best remunerative interests.

Following home sales tumbling last year as rising mortgage rates increased the cost of borrowing for Canadians and slowed the housing market, a lot of sellers are in waiting and watching to see when median home prices go back up and the market starts offering the same types of returns on homes that it was for many years up until the Spring of 2022.

All of this countered somewhat by the fact that newly listed homes were up 3.3% on a month-over-month basis in January. Homes can certainly be listed and not sell though, and the reasons for why that might be would be an entire blog entry of its own. But the reason that’s especially notable in the here and now is supply continues to be very low.

New housing supply in January was the lowest level for that month since the year 2000. What we are seeing is buyers are not finding the houses that they would like to buy, and then they’re not qualifying for the mortgages on the housing they would like to buy.

Correction Mode Continues

It is fair to say the housing market is still in correction mode, but that correction is by and large complete and in all likelihood median home values are not going to fall that much further. It’s also worth noting that these depressed levels haven’t resulted in a wholesale sway over to a pronounced buyer’s market, and the belief is that the more ‘balanced’ one that should be the reality when the dust settles is probably the most beneficial scenario for all.

In terms of prices, the bottom is likely still a ways away, and probably at best around summer time and maybe a little bit later with the market still adjusting to higher interest rates. January’s sales-to-new-listings moving back to 50.7% along with the actual national average home price being $612,204 in January ( -18.3% from January 2022) is in line with that way of thinking regarding the correction still being incomplete.

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So much is being made these days of how the run of ‘cheap money’ is coming to an end in Canada, and there’s likely a whole lot of truth to that. Interest rates aren’t likely to ever again go as low as they were in the early part of the last decade continuing until recently. But what it has already facilitated and something that won’t go away is the extent to which so many Canadians have become real estate investors given how affordable it has been to borrow money and invest it in real estate.

Real estate that has, for the most part, provided very nice returns on those investments given the overheated-market reality that has characterized real estate in much of the country for a long time now. Are fewer people investing in Canadian real estate now? Probably. Are there still thousands of Canadian with a major amount of their investments made in real estate, and with a need / wish / interest in further real estate investments to expand or diversify based on type? Absolutely.

Real estate agents works with investor clients all the time, and there is some worth in mentioning that finding new clients of this type may be more challenging in the immediate future too given how – as mentioned – money’s not so cheap anymore. But our online real estate lead generation system here at Real Estate Leads is an excellent way to continue to have new clients coming into the fold your real estate business and not seeing the same decline in them that you would otherwise if you didn’t have this resource working for you.

Back to topic, let’s have a look at what market saturation may be meaning for real estate investors in Canada now. It may be good information and knowledge to be relaying on to your clients based on what their prerogatives are with purchasing real estate.

Challenged Profitability

It’s well known that over a long stretch of recent years there has been many homeowners who sold their homes during the surge and were able to sell their homes for double the asking price and often for more than double what they paid for them. This worked out to many of these individuals taking advantage of the high demand and owning investment properties or rental property. Ones they would be willing to let go of should the opportunity to make a nice profit on the sale arise.

However, as we know all good things come to an end and we have seen home prices slowly start to decline over the course of 2022 and into this year. So this makes the real estate investing sphere a little cloudier and less inviting for people and some are suggestion that we’ve reached at least something of a point of market saturation given the level of investment made and then paired with the changing dynamics.

So what is market saturation? It is what happens when the volume of a product or service in a marketplace has been maximized. With saturation in place a company can only achieve further growth through new product improvements by taking existing market share from competitors or increasing overall consumer demand. With real estate and market saturation there are two main perspectives to consider: macro and macroeconomic.

The micro perspective looks at markets that aren’t providing new demand often due to intense competition. The macro perspective looks at markets that have already serviced their entire target audience and currently don’t have any new customer opportunities.

A saturated market may lead to investors taking certain strategies. One of them is lowering prices and done to a sufficient extent the market share can increase among customers when the price of a product or service decreases. Cutting costs in another one, and it can be a means to increase cash flow and market share. Diversifying is next on the list, moving into new markets or moving back into ones that were invested in previously.

Real Estate Market and Saturation

Understanding market saturation allows real estate investors and the real estate agents they’re working with to make strategic decisions. Real estate investments require knowledge and research on a specific area’s market and potential clientele. With the housing and rental market slowing as it has been for the past 8 months, the basic crux of the argument for real estate market investor saturation is that the supply of available units is slowly outweighing the number of buyers.

This can signify that the housing and rental market is saturated, but there are a few other things to consider as an investor in real estate. With average house prices and interest rates continuing to rise, there are more people renting instead of buying than ever before. That means matching larger numbers of people who are looking for new rental units.

But along with that there are more investors looking to deal with their own debt and build equity by renting out homes (or portions of them) to local market renters of all types. Others purchased another single-family home as a rental property to make some extra cash. As a results many investors and landlords out there are hoping to invest in units and then rent them out to speed their outright ownership of the property by taking advantage of the current super-high prices for rent in many Canadian cities.

One strategy for real estate investors dealing with market saturation is to be wise about the property they decide to buy, sell, and rent out to people in their city. It’s also important to make those rentals and new properties appealing to a wider group of people in order to reach more people. Clients may also want to have an idea of what they’d be willing to compromise on. Advise them to be willing to make sales in the future too as holding on to properties too long can mean missing out on money and great investment opportunities.

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Canada’s two largest Metro regions are the same two that are always brought up first when people talk about the overvaluation of real estate, but there’s no getting around the fact that these two cities are always going to have the highest average home prices. There is an incredible array of drawbacks to the urban densification trends that are occurring in Canada and making these two metro regions as grossly overpopulated as they are, but that’s another discussion entirely and beyond the scope of what we look at here.

The reality of it is that there’s no end in sight for homes of all types being punishingly expensive in Toronto and Vancouver as all the newcomers push the demand supply of the supply / demand equation even further. But a recent survey is countering all the bad news somewhat for people who are still determined to live in either locale. You have to have REALLY deep pockets to buy a home in either city without taking on a mortgage, but it turns out you may well be getting more sheer value out of that loan than you might have expected.

Those high home values do mean higher realtor’s commissions too, and for obvious reasons connected to that there’s also a gross overpopulation of realtors in Vancouver and Toronto too. Also not going to change, so what a new realtor can do to get some leverage is take advantage of our online real estate lead generation system here at Real Estate Leads. It’s a great way to get more out of your new client generation efforts and also make much less of a task to get your real estate business growing more quickly

Enough about that for now, let’s continue with this week’s news and specifically with how GVA and GTA homeowners have the best loan-to-value ratios with their mortgage of all homeowners in Canada.

Lower Value, Less Risk

With loan-to-value ratios averaging 50% in Vancouver and 53% in Toronto as of the third quarter for 22, mortgage holder in these cities have the most reason to see their investment in financing property favourably. 57% is the national average, and Edmonton and Regina had the highest loan-to-value ratios at 83 and 88% respectively. To give this stat some framing, a loan-to-value ratio compares the mortgage to a property’s value and lower ratios are generally seen to be less risky because it means a larger portion of the property is owned by the homeowner.

3 main factors are seen as being behind this. First, the surge in home prices over the past decade. Second is the ability of more workers to move to relatively cheaper regions because of the increased acceptance of remote work for digital employees. Last but not least is the the ‘Bank of Mom and Dad’ where homeowners in these cities have often grown up there with parents who have benefitted from the strong local economies and they are enjoying some of that generational wealth.

It is true that the ongoing surge in home prices did make it challenging for many Canadians to get into the market, but higher property values have also aided with putting downward pressure on many longer-term homeowners’ loan-to-value ratios – to the tune of a 67% average nationwide.

Smaller Cities with Biggest Individual Gains

The biggest improvements for this were in London, Hamilton, Halifax, and Moncton. 4 markets had loan-to-value ratios that worsened over the past decade and both were larger cities in Prairie Provinces – Saskatoon and Brandon.

The mortgage stress test has also played a positive role, promoting more secure responsible lending practices and giving people more peace of mind that they’ll be able to manage their payments. But interest rate rises have still hurt many homeowners and especially those who locked into variable mortgages when rates were very low.

Those who took home equity lines of credit to help their children buy a house may also not be in the most ideal situation financially, but when those homes are in the GVA or GTA the way those markets are insulated against market shifts because of high demand adds to reassurance that may come with understanding their kids have the best loan-to-value ratios with the mortgages they have on their homes.

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