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.
2nd Quarter Plummet Continues
Canadian households saw a decline of almost C$1 trillion ($775 billion) in net worth in the 2nd 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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