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.<\/p>\n
During April, figures from the Canadian Real Estate Association showed that home sales declined by 12.6% a month after the Bank of Canada announced its first post-pandemic rate hike of 25 basis points, or 0.25%.<\/p>\n
The trend has continued downwards, with a recent Toronto Real Estate Board report confirming that Toronto home prices were down 41% in June , compared to the same time last year.<\/p>\n
What does falling home prices mean for Canadians, whether they are hoping to buy, sell or invest?<\/p>\n
Experts believe house prices will continue to fall<\/strong><\/p>\n 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 3%, or more, to control inflation if required.<\/p>\n Macklem\u2019s announcement comes after economist Stephen Brown announced on June 7 that any further \u201caggressive approach to policy tightening than is ultimately required\u201d could \u201csharply lower\u201d housing prices and risk a \u201cmajor recession.\u201d<\/p>\n \u201cWe forecast a 10% correction based on the Bank of Canada hiking its policy rate to 2.5%. If the bank hikes further than that \u2013 which looks increasingly likely \u2013 then the price decline could be in the region of 15% to 20%,\u201d Brown said.<\/p>\n For Ron Butler, a mortgage broker at Butler Mortgage, Brown\u2019s report \u201cundershoots how bad it\u2019s gonna get.\u201d<\/p>\n \u201cThey\u2019re talking about a 15% reduction in prices. We\u2019re thinking 25%, up to 30%, across Canada,\u201d Butler said.<\/p>\n \u201cSome regions have already gone down 30%,\u201d Butler said, citing \u201c north Brampton is down 30%, parts of Durham and parts of Vaughan are down 30%.\u201d<\/p>\n Who are the buyers and sellers right now?<\/strong><\/p>\n When asked who are the buyers and who are the sellers right now, Butler said, \u201cThe problem right now is we don\u2019t have any buyers.\u201d<\/p>\n \u201cPeople are looking at the extreme increase in mortgage rates , which has more than doubled in 10 months. And they\u2019re saying \u2018we\u2019re gonna wait.\u2019\u201d<\/p>\n \u201cWhen 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\u2019ll be $100,000 less than a few months.\u201d<\/p>\n For Brown, he can\u2019t can\u2019t answer on who is selling, except for those who are forced to do so.<\/p>\n What about investment properties?<\/strong><\/p>\n But for investors, it would probably \u201cfeel like the right time to sell given that the Bank of Canada intends to continue rapidly raising interest rates.\u201d<\/p>\n \u201cIf prices start to fall sharply, then that is when we\u2019ll start getting worried about people being forced to sell,\u201d he added.<\/p>\n \u201cWe are not seeing people sell due to changes in their variable rate mortgage , that is unlikely to cause homeowners to sell,\u201d he said. \u201cThe higher mortgage payments might lead some highly leveraged investors to sell.\u201d<\/p>\n Whether investors are going to see profits if they are selling now entirely depends on the area where they purchased.<\/p>\n \u201cIf they purchased in some of the areas where there\u2019s 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,\u201d said Butler in reference to the Greater Toronto Area real estate market.<\/p>\n \u201cAnd again, it depends what they paid for it when they bought it,\u201d he reiterated.<\/p>\n In early June, the Toronto Regional Real Estate Board said that May home sales dropped 39% from a year earlier and prices rose almost 10%.<\/p>\n Greater Vancouver home sales also slipped to a 32% drop year-over-year in sales, according to data from the Real Estate Board of Greater Vancouver.<\/p>\n Overall, home sales recorded over Canadian MLS\u00ae Systems dropped by 8.6% between April and May 2022, accoding to a June 15 report by the Canadian Real Estate Association.<\/p>\n Who\u2019s been hit hardest by the price drops<\/strong><\/p>\n According to the CREA, the more sizable price declines were observed in the country\u2019s hottest markets, which are southern Ontario and Chilliwack, BC.<\/p>\n Shaun Cathcart, CREA\u2019s senior economist, described the \u201cslowdown to more normal levels of sales activity and a flattening out of prices\u201d as \u201cexpected.\u201d<\/p>\n However, for Cathcart, the surprising part was, \u201chow fast we got here.\u201d<\/p>\n \u201cWith 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,\u201d added Cathcart.<\/p>\n Amid rising mortgage prices, \u201cit is a profound affordability problem,\u201d Butler elaborated.<\/p>\n 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.<\/p>\n This segment of the population had a one-year mortgage at 2.89% rate, but now they are going to face a new renewal rate at 5.89% to 6.19%, he said.<\/p>\n \u201cIt is huge,\u201d Butler exclaimed. \u201cThat\u2019s basically more than double. And that means your payment would increase approximately 52%,\u201d he added.<\/p>\n Economic situation will negatively affect everyone<\/strong><\/p>\n For Butler, he summarized his prediction in one word, \u201cpain.\u201d<\/p>\n \u201cPain for people who have a mortgage, pain for people who are actually caught in a buying process , they bought a home and now they\u2019re having difficulty closing on the sale, or getting their own existing home sold,\u201d he said.<\/p>\n \u201cSo there\u2019s a lot of pain in the marketplace right now.\u201d<\/p>\n Butler also said that the big changes are going to be felt later in the year, \u201cbecause not everybody renews immediately.\u201d<\/p>\n \u201cThe 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\u2019re gonna feel more pain by the fall,\u201d he said.<\/p>\n \u201cA recession by 2023 is guaranteed. 100% guaranteed.\u201d<\/p>\n