05/01/2023
Interesting Article, worth the read.
Predicting where real estate prices will go is incredibly difficult. Here are seven factors at play.
1. The BoC’s benchmark rate
The Bank said in January that it intends to hold the overnight rate at 4.5% for a while to let the impact of all the rate hikes sink in. Already, the total jump of 4.25% since March 2022 has hit home prices hard. However, in making future rate decisions, the BoC will have to consider inflation, employment numbers, the overall state of the economy, and rate decisions from the U.S. Federal Reserve.
2. Inflation
The annual rate of inflation has slowed in recent months, falling to 5.9% in January. That’s likely an indication that the BoC’s rate hikes are cooling price increases. However, food costs are up 10.4% from a year ago, and some economists believe it will be difficult to return inflation to its 2% target in the near future. If inflation remains high, the BoC may have to break its rate pause promise—which would further push down home prices.
3. Mortgage rates
Right now, variable mortgage rates (which are tied to the BoC’s benchmark rate) are higher than fixed rates (which take their cue from five-year government bond yields). Normally, the reverse is true. To complicate matters, fixed rates fell at the beginning of the year but are now trending upward again. High rates are negatively impacting mortgage affordability, reducing the amount buyers can spend on a home. Prices may not recover until affordability improves. �
4. Housing supply
One of the reasons home prices skyrocketed early in the pandemic was that demand exceeded the supply of homes for sale. In February, supply remained tight at 4.3 months (well below the long-term average of five months). An increase in the number of new listings in the spring could keep prices low for longer.
5. Housing builds
The federal and provincial governments want to build new homes fast to alleviate Canada’s housing shortage. How much housing do we need? Last year, the Canada Mortgage and Housing Corporation (CMHC) said we need an additional 3.5 million homes to be built by 2030 to restore affordability. That’s on top of the 2.3 million housing units we were already on track to build.
6. Rents
Renters are having a tough time, too. In many Canadian cities, average advertised rents have climbed above $2,000. The high cost of renting today gives aspiring homeowners more incentive to buy, while simultaneously limiting their ability to save for a home purchase.
7. Immigration
In late 2022, the federal government announced a plan to welcome 500,000 immigrants to Canada each year—about 25% more than usual—for the next three years. Consider the impacts this will have on housing supply and rents (above). A recent Desjardins report says we’d have to increase the amount of new housing being built by 50% nationally through 2024 to “offset the price gains from the increase in federal immigration.”
