The remarkable recovery in Canada’s resale housing market is cooling, as increasingly expensive properties and the promise of higher mortgage rates force out buyers.
Prices are at all-time highs, but the number of homeowners looking to sell has created a glut of inventory. At the same time, anticipated higher mortgage rates and stricter qualification rules threaten to price more people out of the market, ultimately driving prices lower as fewer buyers compete for what’s available.
Any slowdown would hurt the economy. The housing market has been key to Canada’s recovery, with average prices up 23 per cent from their recessionary lows at the end of April, 7 per cent higher than they were going into the recession. The average price of a home at the end of April was $344, 968, the highest on record.
Lower prices and higher mortgage rates mean homeowners would pay more money to service their mortgages, while others could be forced to sell. Rates have recently dipped and are near historic lows but are expected to rise.
CIBC World Markets economist Benjamin Tal said Tuesday that prices could decline by as much as 10 per cent in the next two years, but that a “violent” correction similar to the one seen in the United States remains unlikely.
“We are more likely to see higher interest rates causing a modest decline in prices,” he said. “Because we lack the driver for a more violent decline, we should expect a more orderly rebalancing.”
The recovery has overshot what is justified by the economy, he said, with 17 per cent of Canadian homes trading above their fair value, according to his analysis. Modifying a formula created by the International Monetary Fund, he said prices are higher than they should be in Canada, “as justified by housing market fundamentals such as income, rent or demographic changes.”
