Canadian Real Estate Markets Will Cool, But Don’t Rule Out A Correction: Desjardins

One of Canada’s largest financial institutions sees the market cooling. Desjardins senior economist Benoit Durocher expects real estate to stabilize soon. This won’t be due to government action or new policy measures though. He sees the cooling as a result of a lack of affordability, and the economy reopening. Stabilization is most likely, but cooling by market forces is unpredictable. He suggests people should not dismiss the possibility of a larger-than-expected correction.

Canadian Housing Affordability Is Stretched

One reason they expect the market to cool, and at least stabilize, is affordability. Low interest rates expanded budgets, allowing many to easily absorb higher prices. Then prices moved even higher on the exuberance sparked by the rush of buyers. Homes are now at valuations that are difficult for the vast majority to buy. Even the majority of current homeowners would have difficulty if they bought today.

The lack of affordability has recently led to fewer home sales over the past few months. Even with rock bottom rates, fewer people can afford to be in the market. It turns out a 2% mortgage rate on a home you can’t afford, is still a home you can’t afford. Who knew?

Canadian home price affordability was already stretched, but it’s now at an extreme. Desjardins points to their Affordability Index, which shows large deviations from historic numbers. Of particular concern, in their opinion, is Ontario. The province has almost zero affordable markets now.

They feel Quebec is much better situated from an affordability standpoint. Home prices in the province are still much higher than historic levels. But people can still afford them, which is something a few other places can’t say (*cough* Ontario *cough*).

The Market Will Dictate Home Prices Over The Next Few Months

Durocher feels market mechanics will play out, with supply and demand stabilizing. Higher prices are discouraging home buyers, and will continue to discourage them. This is expected to reduce demand. Fewer buyers will provide some relief, especially if you engage in a bidding war.

At the same time, they expect high home prices to motivate more sellers. Especially those that have been “sidelined” during the pandemic. Anecdotally, more agents have been saying they’re listing homes for people relocating. Cashing out at these levels, and retiring in a more affordable market sounds nice, doesn’t it?

The combination of fewer buyers and more sellers will help to balance demand. At a minimum, this should help relieve the pressure on prices to rise. The economist feels this will provide a balancing effect, aka it will stabilize. If too few buyers show up for the incoming supply influx though, prices will have an incentive to fall.

The End of The Pandemic May Lower Budgets

They also see the end of the pandemic having an impact on a few factors driving prices higher. The end to full-time telecommuting for many may make remote properties less desirable. At the very least, it should help reduce the premium paid for them.

The reopening will also mean people will resume spending on things like travel. Having a life outside of the house means spending money. That leaves fewer dollars to spend on a house, especially when it comes to saving for a downpayment.

The market cooling on its own seems to be a popular take. RBC shared a similar one yesterday, citing a lack of government action as the reason market factors will have to do the work. Even the real estate industry expects more market cooling. They feel government action may be excessive, and they should let it do its thing. But like Desjardins points out, it’s hard to predict the market reaction to more supply. Prices could stop growing, or they could start falling. It depends on how much people are willing to pay for a home when things change.

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