November 29, 2022
Market Trends
RYPM
The Canadian real estate bubble got a big boost from low
rates, and prices are correcting as rates soar. Home prices climbed
aggressively as cheap credit flooded the mortgage market until March. As rates
increased, credit was throttled, and the opposite effect began to appear. Home
prices are now down significantly and likely to slip further as rates rise even
more.
Canadian Real Estate Prices Have Dropped 15% Since Peak
Canadian real estate prices took a sharp drop as the market
psychology collapsed. A typical home’s price fell to $735,400 in October, down
from the March 2022 peak of $868,300. A 15.3% drop wiped out nearly half the
gains made since interest rates were cut in March 2020.
Canadian Real Estate Price Growth
The change in price for a typical home across Canada from March 2020.
Canadian Mortgage Credit Has Been Aggressively Throttled
Due To Normalization
Canadian mortgage rates have also been surging since home
prices peaked. A borrower has seen a 32.2% decline in borrowing power today, in
contrast to the February 2022 low. Reduced mortgage leverage and lower home
prices aren’t a coincidence.
Assets are worth what they can be liquidated for. That means
a regular flow of buyers needs to be both willing and able to pay the current
price. As credit becomes cheaper, leverage rises, and it’s easier to absorb
rising prices. As credit becomes more expensive, leverage is reduced, making it
harder to pay high prices. To ensure flow, prices have to fall or buyers need
to become wealthier.
Canada is currently seeing the exact opposite mechanic that
boosted demand. Mortgage rates were slashed, and credit capacity was increased
by 17% at the peak of the cycle. Predictably, this resulted in a gold rush,
with investors replacing end users of homes. Price growth got a second boost by
shifting cheap credit to deep-pocketed investors. As rates rise, much of this
should be correct.
Higher Interest Rates Slant Home Price Growth Lower
Higher rates have led to a collapse of demand, and rates are
expected to climb further. A hike of at least 50 basis points (bps) are
forecast this month. This would further reduce credit service capacity by
another 5%. It’s a fair assumption that home prices see further downside risk
in the near term.
How much lower is up to debate. Mortgage rates at this
level, make housing less attractive while creating more demand for fixed-income
products. If investor demand shifts to more sustainable areas, demand falls
back towards end-users with much smaller budgets and less leverage to outbid
each other.
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