Canada’s housing market has showcased an astounding surge in house prices, particularly in major cities like Toronto and Vancouver, making it a challenging prospect for home buyers. These escalating prices, which are now viewed as overvalued, can be attributed to various factors such as low interest rates, limited housing supply, and increased demand from both domestic and foreign buyers. While some experts believe that these factors justify the higher prices, others have raised concerns that the market might be overvalued. What is happening exactly?
Rising mortgage and interest rates and their effects across various provinces in Canada
Alberta economist, St Arnaud said “The Canadian housing market remains overvalued by many metrics and the increase in interest rates over the past year has only made matters worse.”
The Canadian housing market has been facing significant challenges with a rise in mortgage rates and reduced affordability. Recent reports have indicated that the five year mortgage rate has surged to 5.8%, marking an increase of 250 basis points since the beginning of 2022.
The impact of these rising costs has posed notable hurdles especially for first time home buyers, and consequently for policy makers and stakeholders in the real estate industry who now have to address the issue of affordability.
St Arnaud and his team attempted to calculate the amount by which home prices would need to decrease to become affordable. According to their estimates, in cities such as Vancouver, Toronto, Ottawa, and Montreal, home prices would need to fall between 35-40 percent to return to affordability levels of the past decade. However, St Arnaud considered the question of affordability as a complex subject.
Vancouver, Toronto, Ottawa, Montreal
If we take Vancouver’s long term house price average as the benchmark, which has historically been more expensive than other cities and assume that house prices in Canada are permanently higher, then only Vancouver and Toronto would require a reduction in house prices. House affordability in Toronto has plummeted, with Montreal, Ottawa and Vancouver facing the worst possible decline in affordability. In Toronto, the average family now has to earn $254,200 to be able to afford a house, which is $15,400 more than in February 2023. Similarly, in Vancouver the minimum income required to afford a house has hiked to $252800, representing an increase of $21700 since February 2023.
Winnipeg, Edmonton, Calgary
Together with expensive housing markets, higher mortgage rates have affected housing markets with historically lower house prices. The effect of rising interest rates is particularly noticeable in Winnipeg, Edmonton, Montreal and Calgary. Since February, there has been an increase of $12,600 in the average income required to purchase an average house in Canada.
Regional analysis of house prices by Moody’s Analytics
An overwhelming number of metro areas are overvalued, due to prices surpassing their fundamental value by more than 10%. According to Moody’s analysis of house prices across various provinces and cities in Canada, most metro areas are expected to undergo house price correction due to a general house price depreciation across the country, however there will be curbing of house prices a lot more in overvalued house markets as demand for housing flattens.
Moody’s predicted that the strongest depreciation rates will be observed in smaller Ontario metro areas including Greater Sudbury, Kingston, London, Barrie, Windsor, as well as Trois Rivieres, Montreal in Quebec and Halifax in Nova Scotia. Meanwhile for Calgary, Edmonton and Saskatoon, house prices will recover modestly. The correction for most metro areas will continue, followed by a recovery period in 2024. On the average, Canada’s housing market growth will be slower, with Montreal experiencing the most notable decline in prices.
Is a house market correction round the corner?
The housing market in Canada experienced a fall during the summer months, with the RPS metropolitan composite index, showcasing a 0.3% decrease in house prices from January to February 2023. The year over year price hike peaked in March but is now declining causing a reduction in equity gains made in the past year. In February, a sharp drop of 4.5% compared to February 2022, that saw an increase of 18.5%. Nonetheless, the decline in prices have not made a great impact on affordability issues, as the five year mortgage rates remain high at 6%, adding substantial burden on the average house buyer who now has to adjust a stagnant income to inflated mortgage rates.
