Douglas Todd: How to make sense of Canada’s falling housing market

Analysis: ‘Buyers don’t know whether to purchase yet. And sellers don’t know if they should sell for less’

From all corners come the forecasts of lower housing prices in Canada. Everyone is nervous.

The predictions portend gloom for many who bought homes in recent years, particularly over-leveraged investors. But drastically reduced prices also signal a possible opening for middle-income earners so far barricaded out of ownership.

The Bank of Canada is expected to again hike the prime rate in September, to about 3.5 per cent. This will further deflate the housing bubble exacerbated by the pandemic, when the bank drastically lowered rates and printed new money, and the Liberal government went further than almost any other to hand out subsidies.

“Both buyers and sellers are now running for cover,” says veteran Vancouver realtor David Hutchinson.

“Buyers don’t know whether to purchase yet. And sellers don’t know if they should sell for less than they would have received earlier in the year. Or to wait until a more favourable market.”

All players are weighing their shaky options while The Desjardins Group is calling for a national 25-per-cent price drop from the peak. And the Royal Bank of Canada is expecting the steepest drop in more than 40 years.

For different reasons Canadians are feeling dark about housing.

More than half the residents in Vancouver,  Toronto and Montreal regions think prices are “outrageously high.” At the same time 25 per cent of homeowners say they will have to sell their home if interest rates go up further, according to Manulife. And no one should forget the millions of tenants fretting about rapidly rising rents.

Here’s some help on navigating Canada’s stormy housing waters.

Some are ‘safe’

Two of three Canadians own their own homes. And 35 per cent of them no longer have a mortgage: They’re fine.

And, despite the debt crunch, the real estate market, especially in Metro Vancouver, still lacks listings. That’s keeping prices a bit steadier than if more homeowners were feeling pressure to sell immediately.

“On the ground things are pretty weak here in Metro Vancouver,” says analyst Steve Saretsky.  “Greater Vancouver homes are selling anywhere from 10 to 20 per cent lower than peak valuations in February.” Vancouver’s suburbs have been hit the hardest.

But while analyst John Pasalis notes Toronto’s prices have already collapsed to pre-pandemic levels, Saretsky says if Metro Vancouver’s “bear market is going to continue inventory needs to pick up. There are fewer houses on the market than this time a year ago.”

Worries will grow for homeowners with cheap mortgages, however, if they are forced to refinance or move because of a job, divorce or another factor.

Meet the most anxious

Investors, people who already own at least one home, were responsible for more than one of five Canadian purchases during the extremely low rates of the pandemic, with their proportion soaring highest in Toronto.

Individuals in Canada who made it their business to buy and rent several dwellings, while waiting for prices to go up, are often over-leveraged. For instance, any who bought into pre-sale condo towers, which were not yet built, will be hammered when they realize they have to fork over the full cost of the completed unit as mortgages rates start coming in between five to seven per cent.

Even while giant corporations have been snapping up properties, many often refer to how “mom and pop” investors get hit first by falling prices. Despite the “cute moniker,” Hutchinson says, “I haven’t really seen this elusive mom and pop investor. But I’ve seen a lot of investors. Some defend investors by saying, ‘Look, they scoop up properties and thereby provide much-needed rentals.’ In reality, investors drive up prices and force buyers into overpriced rental properties. People need to own their own homes.”

Rental squeeze tightens

With the property investment craze collapsing in China, the country now has 50 million empty apartments. But Canada’s falling real-estate prices haven’t necessarily led to a glut of barren units. Few dwellings are empty in B.C., especially where vacancy taxes have been in effect for several years.

Unlike in China, the cost of renting in Canada is actually soaring again. That’s possible salvation for at least some overstretched investors. But it’s making existence hard for the one-third of Canadians who are tenants, especially those currently on the lookout for a place.

Rental prices are up seven per cent across the country compared to a year earlier, according to Rentals.ca. The median rent is $1,750.

And B.C. rental costs shot up much more shockingly than that — by 25 per cent. A two-bedroom Vancouver apartment is the most pricey in the country – at $3,597 per month. The Toronto equivalent comes in second, at $3,115. Meanwhile, Richmond is third at $2,703.

Of note is that the cost of being a tenant in a condo has gone up much more rapidly than for those in a purpose-built rental building, for several reasons.

“I’m not sure if these rental increases will keep condo investors afloat, considering they still have increased costs of borrowing, taxes and maintenance fees,” Hutchinson says. “But it’s certainly a bit of a lifeline for them.”

High immigration will soften Canada’s housing price crash

The difference between China’s investors and those in Canada is that there is virtually no immigration to the populous country. So there is little demand from “new” buyers.

In contrast, RBC chief economist Robert Hogue said Wednesday that high immigration rates will be “a powerful counterforce in Canada’s housing market correction.”

“We expect the number of Canadian households to rise by 730,000 by 2024 compared to 2021. Immigration is key to this surge. Ottawa’s targets are set to bring in a record 1.3 million new permanent residents,” Hogue said.

While the demand from newcomers from India, China and France will soften the price collapse and provide new tenants, many business economists criticize Ottawa for failing to come up with any affordability plan for young Canadians desperate to buy — or for battered renters.

With international student numbers in Canada also rebounding to 700,000 a year, plus a large new wave of temporary workers, Hutchinson is among the many lamenting how the Liberals “are pushing in-migration to an all-time high in an obvious attempt at propping up a lagging economy.”

It’s not very creative, Hutchinson said. “It comes at the expense of affordable housing. And will definitely put more stress on housing supply and affordability. In most instances it will affect those who need shelter the most — first-time home buyers.”

Provided by : Douglas Todd for the Vancouer Sun