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Experts say housing market is heading for 'pain', so what can buyers and sellers expect in this environment?


While economists have previously pointed to international risks, such as the war in Ukraine, as a probable reason for a Canadian recession, our rocky housing market is bringing the prospect closer to home.

During April, figures from the Canadian Real Estate Association showed that home sales declined by 12.6 per cent a month after the Bank of Canada announced its first post-pandemic rate hike of 25 basis points, or 0.25 per cent.

The trend has continued downwards, with a recent Toronto Real Estate Board report confirming that Toronto home sales were down 41 per cent in June, compared to the same time last year.

What does falling home prices mean for Canadians, whether they are hoping to buy, sell or invest?

Experts believe house prices will continue to fall

However, Bank of Canada governor Tiff Macklem is unfazed by the lower house prices. Macklem said that the central bank may even increase its benchmark interest rate to three per cent, or more, to control inflation if required.

Macklem’s announcement comes after economist Stephen Brown announced on June 7 that any further “aggressive approach to policy tightening than is ultimately required” could “sharply lower” housing prices and risk a “major recession.”

“We forecast a 10 per cent correction based on the Bank of Canada hiking its policy rate to 2.5 per cent. If the bank hikes further than that – which looks increasingly likely – then the price decline could be in the region of 15 to 20 per cent,” Brown said.

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For Ron Butler, a mortgage broker at Butler Mortgage, Brown’s report “undershoots how bad it’s gonna get.”

“They’re talking about a 15 per cent reduction in prices. We’re thinking 25 per cent, up to 30 per cent, across Canada,” Butler said.

“Some regions have already gone down 30 per cent,” Butler said, citing “ north Brampton is down 30 per cent, parts of Durham and parts of Vaughan are down 30 per cent.”

Who are the buyers and sellers right now?

When asked who are the buyers and who are the sellers right now, Butler said, “The problem right now is we don’t have any buyers.”

“People are looking at the extreme increase in mortgage rates, which has more than doubled in 10 months. And they’re saying ‘we’re gonna wait.’”

“When people start to investigate buying a home, they do some research, and they quickly find out that the prices are now falling. So no one wants to buy a house, if they think they can wait, it’ll be $100,000 less than a few months.”

For Brown, he can’t can’t answer on who is selling, except for those who are forced to do so.

What about investment properties?

But for investors, it would probably “feel like the right time to sell given that the Bank of Canada intends to continue rapidly raising interest rates.”

“If prices start to fall sharply, then that is when we’ll start getting worried about people being forced to sell,” he added.

“We are not seeing people sell due to changes in their variable rate mortgage, that is unlikely to cause homeowners to sell,” he said. “The higher mortgage payments might lead some highly leveraged investors to sell.”

Whether investors are going to see profits if they are selling now entirely depends on the area where they purchased.

“If they purchased in some of the areas where there’s been very little price change, which is basically central 416, basically Toronto proper, parts of Peel, that there has not been really any specific change,” said Butler in reference to the Greater Toronto Area real estate market.

“And again, it depends what they paid for it when they bought it,” he reiterated.

In early June, the Toronto Regional Real Estate Board said that May home sales dropped 39 per cent from a year earlier and prices rose almost 10 per cent.

Greater Vancouver home sales also slipped to a 32 per cent drop year-over-year in sales, according to data from the Real Estate Board of Greater Vancouver.

Overall, home sales recorded over Canadian MLS® Systems dropped by 8.6 per cent between April and May 2022, accoding to a June 15 report by the Canadian Real Estate Association.

Who’s been hit hardest by the price drops

According to the CREA, the more sizable price declines were observed in the country’s hottest markets, which are southern Ontario and Chilliwack, B.C.

Shaun Cathcart, CREA’s senior economist, described the “slowdown to more normal levels of sales activity and a flattening out of prices” as “expected.”

However, for Cathcart, the surprising part was, “how fast we got here.”

“With the now very steep expected pace of Bank of Canada rate hikes, and fixed mortgage rates getting way out in front of those, instead of playing out steadily over two years, that cooling off of sales and prices seems to have mostly played out over the last two months,” added Cathcart.

Amid rising mortgage prices, “it is a profound affordability problem,” Butler elaborated.

He sees this problem especially with Canadians who have opted to choose alternative lenders, mainly due to lower credit scores, or self-employed status that makes it harder to prove income.

This segment of the population had a one-year mortgage at 2.89 per cent rate, but now they are going to face a new renewal rate at 5.89 to 6.19 per cent, he said.

“It is huge,” Butler exclaimed. “That’s basically more than double. And that means your payment would increase approximately 52 per cent,” he added.

Economic situation will negatively affect everyone

For Butler, he summarized his prediction in one word, “pain.”

“Pain for people who have a mortgage, pain for people who are actually caught in a buying process, they bought a home and now they’re having difficulty closing on the sale, or getting their own existing home sold,” he said.

“So there’s a lot of pain in the marketplace right now.”

Butler also said that the big changes are going to be felt later in the year, “because not everybody renews immediately.”

“The people who are going to be the most affected are going to be renewing in the fall. And the people who have big key locks[new homeowners) are only starting to feel the pain, because they’re gonna feel more pain by the fall,” he said.

“A recession by 2023 is guaranteed. 100 per cent guaranteed.”

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.