It’s hard to believe, but Canada’s epic real estate boom might be ending. That was the ominous warning from Desjardins, one of the country’s large financial institutions. They see higher mortgage rates cooling demand significantly in the coming months. The market is forecast to cool so much they see real estate prices falling towards “real value” next year.
Canadian Home Price Growth Has Peaked
Canadian real estate prices have seen peak growth but have enough momentum to carry values for a few months. The institution cites Quebec’s average sale price hitting 15% since last year, and Ontario seeing 10%-30% growth in major markets.
“Although prices are up significantly compared to a year ago, month-on-month increases seem to be weakening in both provinces—perhaps an early sign that the frenzy is dying down,” wrote the institution.
Higher Mortgage Rates Will Throttle Demand For Home Buying
High population growth and solid wage fundamentals are still intact, so why the slowdown? The institution attributes it entirely to rising interest rates to cool inflation. They forecast that 5-year fixed-rate mortgage interest rates will breach 4% soon, more than double the pandemic low. Doubling interest costs is sure to deflate a little demand.
Existing variable-rate borrowers are also in for a bit of a squeeze. Desjardins explains most borrowers won’t see payments rise necessarily, but would see less of their payment go to principal. “As such, they’ll need to refinance more of their mortgage at renewal,” they explain.
This rise in mortgage rates is expected to cool demand for resales, and first-time buyers, reducing price pressure. In general, higher costs will limit budgets, reducing demand.
The institution warns, “while it may seem hard to imagine now, the residential real estate boom will soon give way to a lull.”
Canadian Real Estate Prices Are Expected To Fall Next Year
Weak demand and reduced budgets are a recipe for falling home prices. They argue lower demand will mean fewer multiple offers on a property, giving the buyers more negotiating power. While only a cool down is expected this year, by next year, they say “it seems inevitable” that prices will fall, in at least Ontario and Quebec.
“Sale prices are expected to come back toward properties’ real value, i.e., lower than the peak prices we saw at the height of the frenzy,” they explain, probably leaving a lot of questions about what real value means.
While they don’t elaborate, a home is worth what someone is willing to pay. If higher mortgage rates shrink budgets, home buyers will see the maximum debt load they can carry shrink as well. If buyers can afford to pay a lot less — sellers get to keep their properties or adjust their expectations.