Canadian real estate prices haven’t fallen much, but the value of the loonie has. BMO Capital Markets warns inflation-adjusted home prices have rolled back almost a decade. In a research note to investors, the bank explains that fundamentals are returning. Weak sales may be less about affordability and more about generational hesitance.
Canadian Real Estate Price Correction Has Been Modest
Any aspiring first-time home buyer will tell you prices are moving lower, just not fast enough. The price of a typical home fell 21% from the record high in 2022, but much of 2020’s low-rate-fueled surge remains. Since the initial correction’s shock, prices have been resistant to further declines. CREA’s latest report shows that a typical home across Canada is just 4% lower than a year prior. A nice discount, but not exactly game-changing for home buyers.
“Canadian home prices continue to drift lower as the market reverts back to income, interest rate and cash flow fundamentals,” explains BMO senior economist Robert Kavcic. He further notes that prices have only fallen 1.4% annualized over the past 3 years, almost a year after the downturn began.
Despite home prices stalling after the correction, there’s been progress. The bank explains that home prices are still up a “modest” 2.2% annualized over the past 5 years, when the correction began.
Inflation Rolled Canadian Home Prices Back Nearly A Decade
Canadian home prices are stagnant in nominal terms, but falling in real terms. “While [real estate prices are] positive, keep in mind that inflation over that period has run at 3.7% annualized, leaving real home prices contracting,” says Kavcic.
Elevated inflation drives borrowing costs higher, but also real prices lower. Canadian real estate’s stagnation has left the real cost of home prices lower. “In fact, in real terms, home prices are now roughly unchanged from where they were 9 years ago,” he says.
Source: BMO Capital Markets; CREA.
Despite this erosion in real terms, home sales remain tepid at the current level. The bank suggests this may have less to do with affordability and more to do with hesitation.
“There is a generation right now realizing that real estate can be a massive wealth creator; but it can also lock in capital and suck up cash flow for prolonged periods. Hence the lack of urgency of new buyers to get into the market right now, and the lack of investor interest,” explains Kavcic.
The problem here being composition. Home prices in Toronto and Vancouver are still out of reach, but now the middle-of-nowhere is trading like Toronto in 2019.
The further you are from the “market,” the longer it will take for prices to correct. I don’t know if Toronto’s done for the next 10-20 years to catch up from the damage it just underwent, but the correction is far from over for “Canada”
Exactly. It was hard for every generation, this generation thinks they just get everything for free. Them not wanting to spend a third of their income on a house is different from them not being able to afford one.
Two time bubble champion home purchaser from Toronto here. The bank wouldn’t lend us against more than 25% of our income, and a third of income was when they considered us a default risk. You know as well as I do that even when interest rates surged in the early 80s, the avg. households still wasn’t spending more than 20% of their income.
Now there’s no affordable. A house turns into a default risk before it becomes “unaffordable.”
If you think people are only spending a third of their income on shelter in the big markets, you are completely clueless.
The takeaway is we couldn’t afford to buy in 2017, and can’t afford to buy today?
Canada’s Boomers think the value of our labour should be cheap, but the cost of shelter should remain high.
What a glorious time to be alive.
Yes. Continued theft in order to take there wealth to the grave doesn’t phase them at all.
Would be interesting to see chart of wages and home prices in Canada in $US.
It’s in the article- the zero line around which the home price index line’s fluctuating.
This chart was published by the Dallas federal reserve, so it should be in USD: https://www.reddit.com/r/canadahousing/comments/n1z52g/chart_comparing_income_to_house_price_growth_in/ although it ends around 2020
Long way back down – 9 years gone SO FAR
DECADES OF LOSSES AHEAD
BE RICH $ RENTERS
NOT HOMEMOANERS!
I think Rob K. is right. I recall from 1990 – 1997 real estate was not of interest to young people. I recall buying a house in 95, with no one my age would even consider it. By 2000 it was all the rage. The problem was, if you bought a house in Toronto in 1988 it would be 20y to recover to that price.
The concern should be that banks learned that rushing to foreclose on people is bad for them. If we consider that the govt has effectively guaranteed 100% of the high risk borrowers, as long as they keep them on the payment treadmill, prices won’t collapse. Prices don’t drop precipituously because of over supply, they drop because sellers are forced to sell.
As long as lawyers aren’t selling off empty houses for pennies on the dollar, prices will stay high. If the bank knows they will be made whole by carney, why not refi those who can’t pay and kick it down the line?
The problem is we know most people are using up ever more credit to stay afloat, and that only ends one way.
Albert Einstein said ‘Compound interest is the most powerful force in the universe’. Debt, inflation, private banks, housing, govt are all the same thing. Canada has seen exponential growth in the amount of money in circulation (M3) since 2015. At more than 20% per year, and created to fund massive price inflation in housing. You can’t have housing rise 225% in 10y and not see inflation bleed through into everything else. The problem is either wages, devaluing the dollar, or prices must correct. Contrary to current govt policy, the best bet would.d be to correct the cause, housing prices.
I just bought a house. It took me 10 years of struggling and saving. After completely foregoing vacations and dining at restaurants, only purchasing thrift and consignment clothing for my family we are finally able to purchase a nice home. I set the benchmark in the community with a price that hasn’t been seen in 5 year. I hope (even after I move into this house) the market tanks. Families need a chance to achieve this. I pray for Canada. 🇨🇦 I finally have hope.