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Canada's housing market is facing a moment when house prices are falling in many cities while owners face higher payments upon renewal.CHUYN/iStockPhoto / Getty Images

One by one, the myths of houses as magical financial assets are being blown apart.

Correction-proof? Nope. A surefire wealth builder, even if you pay top dollar? Wince. A hedge against inflation? Uh, inflation is high and home prices are falling.

Owning a home over a lifetime is a good thing to do for your finances – and for lifestyle reasons. But houses aren’t special. Like any other financial asset, they can turn sour for a time. The better you understand this, the readier you’ll be for whatever home ownership brings you in the decades ahead.

Housing did have a fantastic run until it reached the peak of irrational overexuberance last February. House prices barely acknowledged the global financial crisis of 2008-09, then went ballistic during the pandemic. The average annual gain in national resale house prices from 2008 through 2022 was a pretty great 6.1 per cent, according to Canadian Real Estate Association data.

The average resale price in December, 2022, was $626,318, which is 23 per cent lower than the $816,720 reached last February. More downside seems likely, given that higher mortgage rates are offsetting the benefit of lower prices. It’s easier to save for a down payment amid falling prices but still expensive to carry a mortgage.

One of the foundational myths of the housing boom was that mortgage rates would remain low indefinitely. Frankly, this was sound thinking right up until the pandemic began. In early 2020, rates were actually trending lower in those slow-growth days.

This week’s lowest fixed and variable mortgage rates in Canada

Persistently low rates enabled buyers to take on huge mortgages with the confidence that their payments wouldn’t spike higher on renewal. For decades it was normal to get a lower rate every time you renewed a mortgage.

But rates do surge every now and then. It happened in the 1970s, the eighties and the nineties. The rate increases of the past year look modest by comparison with some of those earlier episodes, but they’re still a handful because Canadians owe a lot more than they used to.

Mortgage rates will come down when inflation subsides, but don’t expect a return to the rates that fed the exceptional price gains of the past few years – unless the economy absolutely flatlines. Having seen how ultralow rates helped ignite inflation, central banks may be more cautious with future rate cuts.

The now-discredited idea that housing is correction-proof was fed by several factors, including high levels of immigration and a mismatch between demand and the construction of new houses and condos.

But housing corrections are not unprecedented in Canada. The Toronto market went through a lost decade in the early 1990s, and both Vancouver and Montreal slumped around that time. Calgary’s market follows the ups and downs of the energy sector.

The most damaging housing myth is that the potential for price appreciation justifies any means to get into the market. The buy-at-any-cost mentality drove questionable decisions to

  • bid way over the asking price, even hundreds of thousands of dollars
  • buy without a home inspection after just one hurried viewing
  • pay a higher mortgage rate to an alternative lender after being rejected by a mainstream bank or mortgage company on the basis of a weak credit score
  • lean on a variable-rate mortgage to keep payments low, even as pressure to increase interest rates began to grow.

When prices kept pushing higher every month, it was easy to rationalize the financial discomfort of paying too much for a house. Soaring prices are proof you made a sound decision, right?

Now we have a market in which house prices are falling in many cities while owners face higher payments upon renewal. If you came down to Earth from another planet and examined the financials of housing right now, you’d wonder why people bothered.

A housing rebound is coming, though. Immigration and the national home ownership imperative assure this. As we wait, consider some rules for buying a home.

One, use The Globe and Mail’s Real Life Ratio calculator to assess the affordability of not just your home but life’s other financial commitments. Two, ask yourself before buying how you’d feel if the price of your house went down 25 per cent after you bought it. If you plan to live in the home for five to 10 years and think it fits your family perfectly, that’s a great answer.

One more rule covers what to do in a bonkers housing market: Stand back, don’t force your way in.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.

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