did you notice In the news, when it comes to the broader economy, things are going badly. And when things go well, we won’t help but point out that it’s a bad omen. It can only go wrong.
In short, no way to have peace of mind.
Take real estate. Last year we made a fuss about overbidding, ridiculous house prices and inaccessibility.
What have I seen everywhere lately? “A historic correction awaits Canadian real estate”. Admit it’s scary.
RBC Bank expects a 20% correction in the country next year.
BMO Capital Markets warned things could get worse.
These scenarios are more alarming than the one presented by Desjardins in the spring. The financial cooperative forecast a 12% fall in Quebec house prices by the end of 2023.
The RBC and BMO analyzes cover Toronto and Vancouver, where the falls could be quite severe.
What does this mean for property owners and those who want to become one?
Not really a drop
Let’s put things into perspective.
According to the Association professionnelle des courtiers immobiliers du Québec (APCIQ) barometer, the average single-family home price in Quebec was $265,400 in the second quarter of 2019. Three years later it reached $448,600. This corresponds to an increase of 69%.
Now imagine real estate falling in value by 20% in a year. The average single-family home price would then drop to $359,000, a drop of almost $90.00.
Even after this so-called “historic” correction, real estate will still be 35% more expensive than in the second quarter of 2019.
For the vast majority of owners, nothing changes. They’ll just be a little less rich on paper than they were short-lived.
Who is at risk?
“Yes, but who bought above, won’t he get in trouble?” you will ask.
We are thinking of everyone who bought their first property last spring. In the second quarter of 2022 (April to June), the median price for single-family homes was 20% higher than in the same period last year. For condominiums, we saw a 14% increase.
As long as these new owners can pay off their mortgage, the situation is not a problem, life goes on. On a psychological level, it’s not comfortable. The prospect of the equivalent of your down payment (accumulated over the years) disappearing in a few months must certainly annoy you, especially since the mortgage does not go under.
The most serious risk for them is not the cooling of the market, but the accelerated rise in interest rates, which has a direct impact on the portfolio.
And what about those who made the minimum 5% deposit when purchasing? Well, you might find yourself in this very awkward situation where the value of your property will be less than your mortgage.
Again, as long as they honor their commitments to their lender, nothing will happen. You don’t have to worry about pressure from the bank.
The situation is no less risky. In a scenario where you need to sell your property quickly (e.g. after a breakup), expect financial losses. In the worst case, homeowners have to cede their house to the creditor. If the fruits of the resale don’t cover the entire loan, it’s up to the mortgage insurance company to foot the bill.
Patience, first buyers
The context will not improve for aspiring buyers. On the contrary, the rise in interest rates has significantly restricted access to the real estate market.
Prices need to come down to compensate for higher financing costs. According to Hélène Bégin, economist at Desjardins, this window will not appear before the end of 2023 at best.
Once at the bottom, we can at least hope for a slightly cheaper market for the trouble. Who knows, maybe it will coincide with a rate cut.
Aspiring buyers may have to wait two more years to see a favorable alignment of the planets.
