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Home for sale in Halifax, Nova Scotia. Thursday, July 22, 2021. Carolina Andrade/The Globe and MailThe Globe and Mail

This is how Canada’s housing market cools: from the white-hot intensity of a thousand suns to merely scorching.

National sales figures for June pegged the average resale home price at $679,051, down from a little over $688,000 in May and an all-time peak of $716,828 in March. This downward momentum is most welcome because the housing market has become a problem. We’ve sold today’s young adults on the wonders of home ownership, but they’re increasingly being priced right out of the market.

Another leg higher for housing is possible when immigration reopens and some of the billions sitting in savings accounts finds its way into down payments. But with interest rates expected to rise at some point in the next 18 months and hints of buyer reluctance to buy at today’s prices, it’s easy to project that we’ve seen the peak in house prices for this economic phase.

Sadly, there’s not much encouragement here for young buyers looking at the market in cities across the country and thinking, “there’s no way.” Only a sharp pullback in house prices will make a difference for affordability.

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To get a sense of how far prices have come in the pandemic, take a look back to the pre-COVID world of summer 2019. The national average resale home price bounced around the $500,000 mark, year-over-year price increases were in the 2 per cent to 4 per cent range and sales were at levels well below the boom of 2016 through 2017. Mortgage rates were higher back then, but affordability anxiety was negligible compared with today.

To get back to summer 2019 levels, the national average resale price would have to fall about 25 per cent. Be careful what you wish for there. A housing crash of this size would likely be packaged with a recession that rivals the pandemic’s economic impact.

A decline of 10 per cent from current levels would represent a significant pullback. Yet we’d still be near the price levels of early 2021, which in turn were more than $100,000 above what we saw in summer 2019.

Pencil in housing at the top of the list of economic megatrends in the pandemic. Low interest rates coupled with off-the-charts demand for detached houses gave us a decade’s worth of house price gains in a span of just a year or so. Without an economic catastrophe, it’s hard to see them settling back to pre-COVID levels.

Lower prices would help affordability, and so would higher incomes. Federal government numbers for May show wage settlements included annual average increases of 2.1 per cent in the private sector and 0.9 per cent in the public sector. With inflation at 3.6 per cent in May, that’s not encouraging.

However, there are signs that pandemic-driven changes in the work force will drive up wages in some sectors. Businesses are having trouble finding workers to fill demand and more competitive pay is an obvious way to attract people.

The higher pay solution to affordability is tricky, though. Sharp wage increases are a sign that inflation is digging in and may prompt the Bank of Canada to take a heavier hand with interest rate increases.

Given how stretched house prices are, higher rates will almost certainly push prices lower. But higher mortgage rates offset the benefits of lower prices.

With a 2.09 per cent five-year fixed rate mortgage amortized over 25 years, a house at the June national average resale price of $679,051 would cost $2,696 monthly if bought with a 10 per cent down payment. If you add one percentage point to that mortgage rate and cut the house cost by 10 per cent, you get payments of $2,710.

Governments could engineer a price decline through measures such as a tax of one sort or another on housing, but that seems unlikely right now. Construction of more accessibly priced houses would help settle the market down, but only in the medium to longer term.

For now, every little bit that prices pull back from the March peak helps. But only a full-on crash would get us back to pre-COVID prices. Many investors bought stocks when the market plunged in 2020 – so much so that brokers were gridlocked by trading demand. Would we be so bold if housing tanks?

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