Why are home prices in Hamilton falling?
There are many factors behind falling home prices in Hamilton. We will look at the impact of mortgage stress tests, new credit rules, interest rates and more.
The impact of mortgage stress tests
The stress test is a requirement for all homebuyers in Canada, and it was introduced as part of the B-20 guidelines. The stress test requires borrowers to qualify at a higher rate than they would otherwise be able to access.
This means that if you're trying to buy a house in Canada with a down payment of less than 20%, your mortgage lender will need to qualify you at a rate two per cent higher than the negotiated mortgage rate on your contract. The intention is to ensure you can handle any potential future rate increases over the life of the mortgage.
Suppose those numbers don't meet their “higher bar”. In that case, they may reject your application outright or ask for more documentation from potential buyers--like proof that there's enough cash flow coming into the household so that bills can be paid even if interest rates increase unexpectedly.
The impact of higher interest rates
You may have noticed that interest rates have been rising lately. This can affect home prices because it affects the cost of borrowing.
Like the stress test, higher interest rates affect how much you can borrow and therefore how much house you can afford. In other words: when interest rates go up, home prices tend to fall because people have smaller homebuying budgets.
More listings and fewer purchases
The number of listings on the market is increasing, while the number of purchases is falling. This means that there are more homes for sale and less demand.
This shift in favour of buyers has led to a decline in prices for several reasons:
Fewer buyers in the market can afford the current asking prices, so only the most attractive properties as being bought. Absorption rates are falling.
Higher interest rates make second homes and investment properties less economically feasible, so some are being put on the market. More inventory is being added.
People trying to sell fixer-upper properties used to get multiple offers, but now they are having to lower their expectations. They are beginning to accept offers below asking.
Speculation and a renewed caution over the economy
One of the most common causes of rising home prices is speculation. Speculation occurs when people buy homes not to live in them, but to sell them at a higher price later. This practice can cause housing prices to rise rapidly, but it also makes homes less affordable for people who want to move into the neighbourhood and buy their own home.
Prices in Hamilton have been falling since mid-2022, and The Bank of Canada has been raising interest rates (most recently in January 2023) in an effort to combat inflation. Higher interest rates, in addition to taming inflation, tend to put the brakes on economic growth.
Falling prices and the prospect of a recession in the near future are discouraging speculators from buying, and some of those that are holding properties will choose to sell now and re-enter the market when it hits rock bottom.
There are many factors behind falling home prices in Hamilton.
There are many factors behind falling home prices in Hamilton. The most obvious one is that higher interest rates combined with the mortgage stress test have reduced the size of mortgages that people can qualify for, this has shrunk their homebuying budget, and so they've had to settle for lower-priced homes.
This lower affordability has led many economists and financial experts alike to believe this will lead Canadians to less expensive options such as renting rather than purchasing.
OSFI, the Canadian mortgages regulator, has proposed to change the stress test on April 14, 2023. In expensive markets like Vancouver and Toronto the new rules further reduce homebuying budgets and it will likely have less impact in across the rest of Canada. Hamilton included.
Conclusion
We've seen a lot of changes in the Hamilton housing market over the last few years. The impact of the pandemic-induced low interest rates pushed demand through the roof. Now, a near tripling of mortgage rates has contributed to falling home prices.
Falling prices and renewed caution over the economy is shifting market dynamics and causing speculators to put purchases on hold.
This year is shaping up to be a bumpy ride for the real estate market in Hamilton. On the bright side, the harder the market falls in 2023, the stronger the recovery will be in the future.
