Canada’s Residential Real Estate Boom Will Soon Turn To A Lull: Desjardins

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. 

16 Comments

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  • Ike 5 months ago

    I can’t see price going back to pre-‘Rona levels. I will take a lot for the owners to capitulate and start selling in droves for 10-15% below recent comparables. Prices will go sideways for a long time and many owners are okay with holding their properties and watching the matket.

    Houses aren’t so volatile like stocks. It’s just not as easy to buy high and sell low unless you really tried.

    • RM 5 months ago

      I think you underestimate fear and necessity. The reality is that if even one person sells lower (ie. because of divorce, job relocation, downsizing to realize capital, etc.), it creates a new comp for the neighbourhood. And I assure you, once potential sellers start to see prices drift lower they will get anxious. Greed and fear. It’s just human nature.

    • david 5 months ago

      It is not about sellers who will wait, it is where the demand is at.

      If people can’t afford pay a house without a 30% discount because of rising rates, then any house that sells at that discount price will set the new standard. exactly like on the way up.

    • Kate 5 months ago

      It depends how leverage you are.

    • Jason 5 months ago

      Prices will be down 40% by next summer. Insolvencies will trigger it. It’s a losing investment. Doesn’t matter if a sellers expectations aren’t met they will have to sell because they can’t handle the monthly payments. Canada will enter a recession. The government will allow prices to come down to get us out of it because they will need people spending again and printing money only works for so long. People will want to be able to go out for dinner, to a an event and on vacation not have to pay higher debt payments. That will also reduce demand.

    • Alan 5 months ago

      A bundle of sticks at Wasaga Beach will still be worth more than an oceanside mansion in Fort Lauderdale, Florida?

  • bernard 5 months ago

    It’s going to get rather ugly out there, wages vs inflation and rising rates, plus likely recessions in several parts of the world, some people that cannot requalify, rates that could easily exceed what is forecast now, the reality is the never ending price rises as well as just being able to keep up with all of the day to day costs and rate rises will mean less new people coming into the market,builders and investors fall out of the market = squeezes and price drops like it or not.

  • Manav 5 months ago

    Whyd do people forget cost of construction; its up 35% since 2017

    I doubt it will go down when wages are increasing but yes cost of products /lumber can go down but it will be around 25-30% mark from 2017

    Lets not talk about stagflation or recession

  • Jason 5 months ago

    Prices will be down by 40% by next summer

  • Manny Ray 5 months ago

    “Owners” are ok with holding but are the “investors” owning 35% or more of the housing stock ok holding too with costs of holding multiple properties rising?? That will be the deciding factor.

  • Flo 5 months ago

    Demand to purchase all types of housing has been pulled forward. Therefore, less demand in the future. Is the future next year or this year? Less demand=lower prices.
    This has been a good deal for the government. Tax paid on the higher values of properties, tax paid on the higher commissions, and tax paid on everything else at higher levels. So what do they do? Well, you lower the price of properties, so that buyers who could not afford the bubble prices, will now be able to continue to buy and pay tax. Keep the receipts going!
    For governments, housing really was a good place (maybe the only one) to get a lot of money, while spending profusely.

  • Chris 5 months ago

    Owners will hold…if they can. What does renewal look like for folks with 2% mortgages now who renew at 6%? Basic rule of thumb is monthly mortgage increases by $100 for every $100k owing every time rates go up by 1%. So someone’s $500k mortgage would see payments increase by $2,000 a month. Everyone’s got that left over at the end of the month that they didn’t need? No one will need a bigger house, a downsize, transfer to a different city? I can’t say how much of a drop will take place overall but IMO there will be great deals out there for shrewd buyers in the coming years.

  • This Will End Badly 5 months ago

    I think what most of us don’t understand is that a 20-30% drop not only means the value of our home will fall, it also means that when you renew your mortgage loan the bank/lender will only give you a amount based on the current value of of home. Meaning, if you have a 1mil home and it drops by 30% the bank will only give you 700,00K.

    Let that sink in for a minute….

    • Alan 5 months ago

      What irks me about these “my $10,000 home is worth a million dollars” is that the City of Toronto is slow to calculate the property taxes based on the “muh million dollar home” value, but my savings and investments are taxed by the CRA based on net present value (i.e. if I got a $20 gain in a stock I get taxed on it minus any dividend tax credit).

      The system is unfair for those who plan to work, save and invest. What is the use working hard when a home makes more money than a doctor and doesn’t get taxed as such?

    • This Time Is Different 5 months ago

      Great point! The “unspoken reality” is that a $1M home is most likely mortgaged for $800,000. So, if the value drops 30% owners will then have a $700,000 home with approximately a $700,000 mortgage (after 3+ years of mortgage payments). When it is time for renewal the bank will only advance $560,000 (80%) against the $700,000 home value, which means you will need to come up with $140,000 to cover the difference. You will have less than 90 days to do this. Very few people will choose to throw another $140,000 at an asset that has now lost them their original $200,000 down payment, plus $100,000.

      This is a housing margin call. This happens more frequently than you think and it happens in good times and bad times, in bubbles and in crashes. If you live in Toronto this will be epic for two reasons. First, very few homeowners alive today remember the last crash (1989-1991). Second, it is quite inconceivable to imagine what the end of a 20+ year housing boom looks like. If your neighbour has to sell for a 30% loss then that becomes the “comp” for the next person to sell, and so on and so on.

  • Agent bob 5 months ago

    Prices have already dropped by as much as 15% in some areas.
    When LePage said prices will rise by 15% this year many areas had already gone up by 25% so they were actually forecasting a 10% drop in many areas.
    Price drops will continue. It was bound to happen as our prices have gone up higher than anywhere else on earth partly due to poor BOC and government policies.

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