Why even falling prices won’t make housing affordable anytime soon

Canada’s hot housing market is finally showing signs of slowing down. Sales volumes and listings plummeted as interest rates began to rise. But even a dramatic drop in prices won’t bring home ownership back within reach of many of those priced out of the market.

“It’s a drop in the bucket,” said real estate researcher Gillian Newing. She has been trying to buy a house for five years. She works in advertising in downtown Toronto and has spent years saving and monitoring the real estate market.

“I make over six figures a year,” she said. “But as a bachelor, I have no chance of getting my foot in the door.”

She was trying to buy a first home or a condo, but found the prices were still out of reach. After prices spike during the pandemic, she fears she’ll never get in.

“I did everything they told me I had to do in life,” the 36-year-old said.

“I went to school, I graduated, I paid off those debts right out of school. I put money in the bank from the start and yet every time I I’ll see, I’m probably $50,000 to $100,000 behind on what I need to put down to buy a house.”

Gillian Newing, 36, has spent years saving and hoping to enter the housing market. After real estate soared so high during the pandemic, she says “chilling” prices aren’t even a drop in the bucket. (Submitted by Gillian Newing)

“Someone turned off the lights”

The housing market is in a slump, especially in cities like Vancouver and Toronto. People have been writing warnings about Canada’s overly hot real estate for decades.

Even by those standards, the sharp rise in prices since the start of the pandemic was quite staggering.

The house price index compiled by National Bank shows that the national average has climbed 31.2% in the two years since the collapse of COVID-19 around the world. According to economist Daren King, during the pandemic, demand skyrocketed and supply plummeted, leading to record statistics.

“Dizzying price increases have been recorded in several cities included in the index over the past two years, including a 65% increase in Halifax, 55.4% in Hamilton and 39.8% in Ottawa-Gatineau he wrote in a report.

But in April, when the Bank of Canada raised its overnight rate by 0.5%, the big banks quickly followed suit, increasing the amount they charge borrowers.

And suddenly the housing market isn’t as absurdly hot as it was just a month ago.

“January, February was kind of the peak of madness,” said Steve Saretsky, real estate agent in Vancouver.

“It’s kind of like someone turned off the lights.”

Tiff Macklem, Governor of the Bank of Canada, speaks during an interview on April 13. The Bank of Canada raised its key interest rate by half a percentage point in its biggest hike in 22 years, and said rates are set to rise significantly as it fights aggressively against inflation since a three-decade high. (Justin Tang/Bloomberg)

Price drop announced

RBC economist Robert Hogue says it’s not just sales activity that’s declining; prices are also falling.

In a report last weekit predicted prices would peak this spring and decline an average of 2.2% in 2023 – while previous forecasts called for a 0.8% rise in 2023.

“We believe the national benchmark price could decline nearly 5% on a quarterly basis, from peak to trough,” Hogue wrote.

Saretsky says it will be worse. He already sees properties selling for 10 or 12 per cent less than comparable homes that sold just six or eight weeks ago.

“That’s comparing it to a peak price, where I think people in February had lost their marbles and were paying way too much,” he said.

Real estate signs for sale in Oakville, Ont. (Richard Buchan/The Canadian Press)

If you bought a house in February and see your neighbor move into a similar house today at much lower prices, Saretsky says you’re bound to feel like you paid too much.

But don’t these falling prices represent an opportunity for house hunters like Gillian Newing? She’s not so sure. The “chilling” prices don’t bring these homes back into an affordable range for her.

“Cooling doesn’t start to solve the problem,” she said. “It doesn’t need to cool, it needs to change drastically.”

WATCH | Slight price declines seen after interest rate hike:

Canadian housing market sees signs of slowing as interest rates rise

Experts say rising interest rates are slowing Canada’s boiling real estate market, leading to lower sales and a slight dip in the average selling price in March. 2:03

Buyers in a hurry

A 2.2% decline (as required by RBC Economics) would not even bring prices back to the levels seen in March. Even Saretsky’s more grim 10% warning wouldn’t do much.

In fact, if you use the MLS home price statistics published by the Canadian Real Estate Association, a 30% drop would only bring us back to the prices people were paying at the end of 2020.

At the time, buyers and experts were already sounding the alarm about a possible real estate bubble.

And even if prices go down, say 5%, interest rates are expected to go up about 2% this year alone.

Real estate agent Sarita Raisinghani says soaring inflation means many household budgets are already stretched to the limit.

“There is frustration,” said Raisinghani of Better Homes and Gardens Real Estate in Toronto. The buyers she represents are finding homes increasingly out of reach.

“Buyers will peak and after that they will be eliminated,” she said. Most of the transactions she facilitates are for homes that sell for over $1 million. Thus, buyers must deposit at least 20% to avoid having to pay mortgage insurance.

All of this leaves potential buyers hopeless.

“I lose no matter what,” Newing said. “Now even if I’m buying, I know I’m buying something that’s too expensive for what it is, and if they figure out how to fix it in five to 10 years, I’m the one who bears the cost. weight. I pay one way or another.”