High interest rates cloud Canada's housing market

High interest rates cloud Canada’s housing market

By Julie Gordon

OTTAWA (Reuters) – Canada’s housing market has cooled as buyers sidelined by soaring borrowing costs and sellers holding back the quote in hopes of a spring recovery, while higher interest rates mean prices need to fall further before a rebound materializes, experts say.

The Bank of Canada has signaled that its historic tightening campaign is coming to an end, although economists expect the central bank’s key rate to remain at a 15-year high of 4.25% or 4.5 % throughout 2023, which will put downward pressure on prices.

At the same time, Canada needs to build 3.5 million more homes by 2030, according to the country’s national housing agency, to meet the current shortage as well as growing demand from millennials and newcomers to the country as the government increases immigration targets.

“We still have quite a bit of fundamental demand there…but the market just can’t balance out at current prices due to falling interest rates,” said Robert Kavcic, senior economist at BMO Capital Markets. .

“Prices have to adjust and that takes time.”

BMO predicts a 20% drop in house prices, from peak to trough. They are already down 10% from February’s peak, after falling 1.2% in October from September, according to data from the Canadian Real Estate Association (CREA) released on Tuesday.

Chart: Canadian home prices fall to record low https://graphics.Reuters.com/CANADA-ECONOMY/HOUSING2/klvygkkyavg/chart.png

Home sales rose slightly in October, suggesting that buyers and sellers “will likely continue to steer clear” in 2023, CREA President Jill Oudil said in a statement.

But she warned it would be a far cry from the boom sparked by the COVID-19 pandemic, when prices soared 52.4% in the two years to February 2022 amid record low interest rates, the desire more space and speculation determined the market. on the fire.

The Bank of Canada has raised its key rate by 350 basis points since March to the current 3.75%, making borrowing more expensive, and it is widely expected to rise again in December .

“It’s scary for someone looking to buy,” said Victor Tran, a mortgage expert at online broker Ratesdotca. Variable rate mortgages – home loans whose interest rate fluctuates with market conditions – have more than tripled since March, with strict stress tests making qualification even more difficult.

Peggy Hill, who runs a real estate company in Barrie, Ont., has seen many first-time buyers throw in the towel with a purchase because the monthly payments for a typical home in the city, about 110 km (68 miles ) of Toronto, would simply be too high.

“We killed our first buyers,” she said. “They’re gone…they can’t afford to pay off this debt.”

Chart: Canadian Home Sales Fall on Rising Rates https://graphics.Reuters.com/CANADA-ECONOMY/HOUSING1/egpbykkgdvq/chart.png


And it’s not just the resale market that’s feeling the pinch. Pre-sales of condos in the Toronto area fell 79% in the third quarter, according to data from Urbanation, with 189 projects seeing no sales in the quarter.

“You can tell there’s been a pretty big deterioration in market confidence, especially among investors,” said Shaun Hildebrand, president of the Toronto-based real estate data consultancy, adding that investors hold approximately 70% of condominium units under construction in the region. .

“If investors aren’t interested in buying condos, the whole market starts to slow down,” he said.

Adding to the pressure, a record 30,000 condo units are expected to be completed next year. But much higher mortgage rates mean some homeowners may not qualify and may be forced to sell their homes, leading to a flood of listings, experts said.

At the same time, more sellers than ever are waiting in the hope that spring will bring a boom in demand and higher prices, Hill said.

“They’re all betting on things changing like magic. And I don’t see it,” she said.

(Reporting by Julie Gordon in Ottawa; Editing by Paul Simao)

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