Canadian Confidence in the Real Estate Market Plumets
Real estate has long been a cornerstone of the Canadian economy and a source of pride for Canadians. However, recent years have seen a significant decline in confidence in the real estate market. With high prices, low purchase volumes, increasing economic uncertainty, and rising mortgage rates, many Canadians are concerned about the future of the housing market. In this blog post, we'll explore six key reasons why Canadian confidence in real estate has plummeted.
1. High Housing Prices
One of the most significant reasons for the decline in confidence in the Canadian real estate market is the high cost of housing. Across Canada, housing prices have been on the rise, making it increasingly difficult for first-time buyers to enter the market.
It seems intuitive that higher home values will price more potential buyers out of the market. According to the Canadian Real Estate Association, the average home price in Canada was $678,091 in January 2021. This represents an increase of 22.8% from the previous year, which is a staggering rise. As a result, many Canadians are finding it challenging to afford a home, which is leading to a rise in rental demand and lower purchase demand.
2. Population Narrative Has Been Debunked
Another reason for the decline in confidence in the Canadian real estate market is that prices have begun to fall across Canada even though immigration has been breaking records. There has been an ongoing narrative that continuous population growth will lead to ever-higher home prices, regardless of other factors like interest rates and incomes.
Since mid-2022, prices have been falling despite population growth and very low supply.
3. Economic Uncertainty
Economic uncertainty is also a significant factor in the decline in confidence in the Canadian real estate market. Many Canadians are concerned about the looming recession and the effect it will have on the real estate market. This uncertainty has led to a decline in confidence and a decrease in the number of people looking to purchase a home.
4. Government Intervention
In an attempt to address the overheating housing crisis, the Canadian government has implemented several policies.
In hindsight, the government’s policy to implement a stress test to help ensure Canadians could handle their mortgage payments if interest rates were to rise was brilliant. Mortgage rates have almost tripled since the pandemic, and the stress test has helped ensure people who bought in a low-rate environment are not forced to sell their homes.
The federal government has also imposed a 2-year foreign buyer ban. By restricting foreign luxury buyer demand the policy is intended to improve affordability. there are several ways around it however, it could be having its intended effect. Demand is lower than last year, and prices are falling (i.e., becoming more affordable).
5. Rising Mortgage Rates
Finally, rising mortgage rates are another key factor contributing to declining confidence in the Canadian real estate market. As interest rates have started to rise, many Canadians are finding it more challenging to afford the same-sized mortgages they could get a year ago. The Bank of Canada has signalled that it may need to raise interest rates further in the near future if inflation isn’t brought under control, which has led to a decrease in homebuying budgets and a decline in housing purchases. This has put additional pressure on the real estate market, making it even more challenging for Canadians to purchase a home.
Conclusion
The decline in confidence in the Canadian real estate market is a complex issue with multiple factors at play. From high housing prices and debunking the population growth myth to economic uncertainty and government intervention, many Canadians are understandably concerned about the future of the housing market. However, it's important to note that the Canadian real estate market has historically been a stable and secure investment for Canadians, and while the current situation is challenging and many markets are experiencing major corrections, it's not necessarily indicative of a long-term trend.
However, we still do not know how ageing baby boomers downsizing over the next 20 years will impact the market. They predominantly own houses, and they will be buying apartments. This is a wild card.
Baby boomers aside, the near-term future of the Canadian real estate market remains uncertain. Long-term, with ongoing government support and a commitment to addressing the root causes of the current issues, there is reason to believe that the market will recover.
