When the term correction is applied to a market, it’s a little bit ambiguous with what exactly that means. Most of will learn at a very young age that to be corrected is to be made aware of your error and what you should understand to be accurate instead. When it comes to markets of any sort, the average person will only claim to know that a correction means prices for whatever it is making up that market come back to where they should be.
That’s not inaccurate, but when it comes to the Canadian Housing Market it’s an overly simplistic view of it. The reason for that is that there are so many variables that factor into the market and it’s not like housing is anywhere near a basic commodity. We don’t need to into that here, but economists and realtors alike will have a more inherent ability to see into the market and understand all of the different contributors that go into determining what would be the natural state of the market.
It really is about as grey an area as can be though, and the one area where people will be inclined to agree or disagree is how detrimental it is when government intervention factors into the state of the market, and distorts what would be seen as a ‘natural’ housing market correction. But at ground level what agents and their clients will see is median home prices coming down, but a lack of supply meeting huge demand creating a scenario where homes nearly always sell for over asking.
This take a great number of would-be buyers out of the game, and for realtors who struggle to drum up first-time homebuyer clients our online real estate lead generation system here at Real Estate Leads is an excellent way to get better results in this regard and build your real estate business – no matter the current state of the market. We’ll now continue to discuss why many are saying the current market correction isn’t anywhere near done.
Continued Decline Into 2024
Canada’s real estate correction hit pause after the central bank promised a pause on BoC interest rate hikes in January of this year. So at that time it looked like home prices had bottomed out after falling more than 17% from a March ‘22 peak. Home prices quickly moved in the opposite direction, and going up by tens of thousands monthly with the release of pent-up demand for housing.
But now some 7 months later, we are seeing that prices in key markets are dropping, as the latest hike rate hikes went against that promise of a pause but – in fairness – were needed to continue the fight against high inflation in Canada. So the overarching belief coming out of this is that Canada’s housing downturn or ‘cool off’ isn’t even as close to being over as many think.
There are some who foresee home prices going down by another 10% or so by the first half of 2024. If that projection materializes then a typical home across Canada will have dropped between 20% and 25% and that lines up with their earlier forecast at the start of the correction.
The bounce back seen in January is unlikely to occur again, and one of the best indicators of that is the way that typically real estate corrections are accompanied by rising unemployment plus declining consumer demand. That wasn’t seen here with first half of the correction, and that’s because Canada had an economy that outperformed expectations. You won’t have increasing unemployment or reduced demand when an economy is doing even fairly well.
Canadian Mortgage Rates to Go Up Too
Canadian mortgage rates have been comparatively quite low for a long time, and much has been made of the ramifications of when it’s cheap to borrow money. That’s another tangent we don’t need to go off on, but what we would say here is that the Bank of Canada is also likely to raise rates again, and what this is expected to do is raise mortgage rates to an expected 6.1% by Q3 for 2023.
Higher costs are already promoting investors moving away from real estate investment. There are estimates that residential investment’s will expand on the 3.9% quarterly decline that was recorded for the first quarter of 2023. The expectations are that through next year construction, renovation, and home resales will slow even more as financing costs rise and investment returns have less luster to them.
Other economists will say that in the event that a correction is mitigated, a larger correction will be required and not too far down the road. This is a tradeoff for short-term satisfaction that will always come at the risk of more economic damage.
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