Much has been spoken and written about skyrocketing prices, elbowing out first-time buyers and by some, an imminent price “crash” in the making.
But the dust seems to be settling on Canada’s real estate market.
CREA data tells us the March 2021 peak of over $716,000 is now a thing of the past. The average price in August was $663,500, about the same as July. For four straight months, prices headed south before leveling off. This fall tells a little about what is coming.
First, the decline is no correction, let alone a crash that a few analysts were predicting. The average house price in Canada is still 20 per cent more than what it was a year back. The March high could have been an outlier or culmination of the frenzy that had hit the market last year.
A crash in prices seems nearly impossible. Housing markets across the globe are beating all pandemic odds. In the U.S., the median price has been rising year-over-year for over 100 straight months. In neighbouring Canada, there exists no single pointer to forecast any bubble burst.
Liquidity has contributed to average price growth. Mortgage rates, both in the U.S. and Canada, are at a record low, thanks to near-zero policy rates of the respective central banks. Canadians have money in their bank accounts, and Statistics Canada’s data on how people have paid off non-mortgage debt at the fastest pace in almost three decades corroborates this point.
The second pillar of liquidity, aside from a low policy rate, is the federal government’s cash support to families and businesses. During the election campaign, both the Liberal and Conservative parties promised billions of dollars in new spending, and hence liquidity is not going anywhere soon.
It is likely that around $650,000 may remain the new benchmark for the average house price in the near-to-medium term.
The new reality might be a further dip in sales volume. Consider this. CREA data suggests that sales were down 14 per cent in August 2021 as compared with August 2020. For four consecutive months, a decline in the number of houses changing hands was been observed, before rising by half-a-per-cent in August.
What can be the reason for a dip in sales volume? Is it because buyers are thinking twice now before bidding heavily for a house? Data by Equifax suggests that Canadians availed over 400,000 home loans, a record-setting figure, in the second quarter of 2021. That was a time when many were optimistic about economic recovery in the near term. The Delta variant has dented hopes, and to the disbelief of many, the economy contracted 1.1 per cent in the second quarter.
Although the federal government’s support schemes are up and running, elements like subdued GDP growth and lesser-than-expected job creation hit the sentiments of buyers.
Sellers too are in a fix. The housing market was on fire over the past year, and the average price was hitting new records until March 2021. Sellers are aware of all these developments. The times when the price of any asset appreciates beyond expectation sees even reluctant sellers willing to liquidate their holding. These factors sustained high sales volumes until a few months back. The dip in the average price, however, could have made sellers reluctant to liquidate their assets.
A quick analysis of housing market data predicts stagnation.
Two opposing forces can shape the market. The first is adequate liquidity in the economy that will not let prices dip any further. Many buyers will still be ready to purchase a house at the $650,000 level.
The Bank of Canada is unlikely to raise the rate anytime soon, and hence mortgage availability and affordability will also give support to the average price.
The second force revolves around sellers that have read and heard a lot about the average price penetrating the $700,000 level. Informed sellers also know that there is no crash or even a correction in the making in the U.S.
Now that the average price in Canada was $50,000 less in July as compared with a few months back, it may make more sellers reluctant to liquidate their assets.
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Kunal Sawhney, September 20th, 2021
