The pace of the real estate slump in Canada has intensified, as home sales and average prices continue to decline from last year. The Canadian Real Estate Association (CREA) reported that the average selling price of a home now stands at $665,850, representing a nearly 20% drop since February. Furthermore, home sales have decreased by 5.6% in the past month and are down by almost 25% compared to the previous year.
The slowdown in the housing market can be attributed to rising interest rates and uncertainties brought about by the ongoing pandemic. After experiencing rapid growth during the early stages of the pandemic, higher interest rates have put the brakes on Canada's housing market this spring. Average selling prices have been on a downward trend since February 2022 and have declined by 1.8% compared to the previous year.
According to TD Bank economist Ksenia Bushmeneva, the market downturn is particularly evident in Ontario and British Columbia, where housing affordability deteriorated significantly during the pandemic. She predicts that home prices and sales will continue to decrease under the pressure of borrowing costs.
While lower prices may seem favorable to buyers, it is important to note that the cost of financing a mortgage has increased more than the drop in prices. The Bank of Canada recently raised its benchmark interest rate by a full percentage point, the largest increase since 1998. This marks the fourth rate hike this year, with more expected due to record-high inflation. As a result, variable rate loans have risen to around four percent, compared to under two percent at the beginning of the year.
The stress test rules implemented a few years ago also pose a challenge for borrowers. These rules require borrowers to qualify at rates higher than the loan term itself. Currently, the stress test level for a variable rate loan is approximately six percent, making it difficult for many borrowers to meet the qualification criteria.
Despite the potential benefits of lower prices, prospective homebuyers like Waleed Hamed remain cautious. Hamed has been patiently waiting for an opportunity to enter the housing market but believes that further price declines are imminent. While the market may appear softer, the rising interest rates present a significant obstacle for potential buyers.
It is important to acknowledge that the responsibility of the Bank of Canada is not to safeguard the housing market or individual homeowners but rather to maintain financial stability. Financial technology company NerdWallet emphasizes the importance of the mortgage stress test in ensuring the resilience of the housing market.
As the real estate market in Canada experiences a rapid shift, potential buyers find themselves caught between a rock and a hard place. The market itself may be softening, but the increasing interest rates pose a significant challenge.
Waleed Hamed has been waiting to buy a home for several years, and says he has been watching the current slowdown with great interest. (Image Source: CBC)
