November 29, 2022

Market Trends

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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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