The market has been extremely strong and it’s really at the supply level that we have to work
declared the Minister of Finance of Quebec, Eric Girard, to Economy zone Thursday evening.% compared to the average of the 10last years. We have programs for social housing, for affordable housing, rent supplements.”,”text”:”Housing starts are up 50% compared to the average of the last 10 years. We have programs for social housing, for affordable housing, rent supplements.”}}”>Housing starts are up 50% compared to the average of the last 10 years. We have programs for social housing, for affordable housing, rent supplements.
Despite this, the Legault government has decided to harmonize its tax rules with those of the federal government. in the implementation of the CELIAPPthe Tax-Free Savings Account for the purchase of a first home, a tool created by the federal government in its budget presented last April.
This program allows first-time buyers to inject $8,000 per year into a tax-free account up to a lifetime cap of $40,000. Contributions are tax deductible and withdrawals, including capital gain, are not taxable.
When we stimulate a sector of demand, it is certain that we have an impact on all of demand.
, acknowledges Minister Girard. But, for him, by targeting the first buyers, this stimulation of demand is still limited. We focus only on the first dwellings. And it’s a program that’s appropriate now that the market is cooling down a bit.
More and more highly indebted households
This support for demand comes as the Bank of Canada issues a warning regarding the over-indebtedness of several households. We know that many people have embarked, during the pandemic, on the acquisition of a larger, more spacious property, more suited to their expectations, but also at prices that have also put them in debt for a long time. These highly indebted households may soon be required to pay hundreds of dollars more in mortgage payments.
A growing number of households have taken out large mortgages to buy a home, adding to the already large share of highly indebted households
writes the Bank of Canada in its review of the financial system presented on Thursday.
« Due to higher interest rates, some households, especially the most indebted ones, will see their financial leeway greatly reduced when renewing their mortgage. »
<q data-attributes="{"lang":{"value":"fr","label":"Français"},"value":{"html":"Et l’inflation élevée érodera le pouvoir d’achat des ménages si les salaires ne suivent pas. Enfin, les propriétaires– especially the most indebted among them– may not be able to tap into their equity in the event of a price correction”,”text”:”And high inflation will erode household purchasing power if wages do not follow . Finally, owners – especially the most indebted among them – may not be able to tap into their equity in the event of a price correction”}}”>And high inflation will erode household purchasing power if wages don’t keep up. Finally, owners – especially the most indebted among them – may not be able to tap into their equity in the event of a price correction.lit-on.
Generally speaking, the rise in property values, the rise in stock markets and the growth in liquid assets have resulted in the general financial situation of households in Canada improving since last year.
But, according to the Bank of Canada, a growing share of households have put themselves in dire financial straits to buy property amid high house prices
. And the number of highly indebted households is reaching record highs.
Thus, the share of households whose debt represents more than 350% of their income has increased from 6.5% in 1999 to 18.7% in 2021. This share is only increasing, year following year.
People who bought properties in 2020 or 2021 and who will have to renew their mortgage term in 2025 or 2026 might see their monthly mortgage payment increase by 30% to 45%. That’s hundreds of dollars more to pay every month, thousands of dollars more annually.
Along with these additional interest costs, many households must contend with other types of debt. And these same households have to live with galloping inflationparticularly on fuels and food.
These factors suggest that some households will need to reduce spending to service their debt as interest rates rise. In this context, highly indebted households are particularly vulnerable to a loss of income, especially if it is combined with a fall in house prices.
warns the Bank of Canada.
Price drop of 10% to 20% in sight?
Moreover, the real estate market is entering a correction, according to Desjardins. Economists at the financial institution say the sector has just reached an inflection point
that a correction is beginning, but it is not a collapse.
The average price of an existing property in Canada has increased 50% since the end of 2019. It fell from $530,000 to $790,000 at the February 2022 peak.
After a surge in prices and sales in late 2021 and early 2022, prices began to decline in March and April, as did sales which have fallen 18% since February. And it will continue, according to Desjardins, due to the rise in interest rates, which affects demand.
Thus, from the peak of February 2022 to the end of 2023, the average price of properties should fall by 15% across Canada and by 12% in Quebec. The decline should reach 18% in Ontario and 20% in New Brunswick.
The surge in prices was greater in Ontario than in Quebec. The debt ratio is lower and the level of savings is higher in Quebec. The situation is less critical than in Ontario in terms of affordability, according to Desjardins.
The balance to be found
What is striking in the latest data that have been published is the increase in the number of highly indebted households, households whose debt represents more than 350% and even 450% of their income. This share is growing and should sound the alarm in Canada.
Part of the exceptional price increase since the start of the pandemic might be due to the formation of extrapolative expectations
says the Bank of Canada. This phenomenon occurs when people come to expect prices to rise in the future simply because they have risen in the past. It is then possible to see home buyers flocking to the market for fear of missing out on a bargain or in the hope of realizing significant capital appreciation. […] Extrapolative expectations, especially among investors, might amplify and accelerate price declines in the event of a correction.
Do we still need to stimulate demand, even for first-time buyers, when over-indebtedness raises concerns, interest rates begin to rise, a recession is possible and a decline in properties is on the horizon?
And let’s go further: we can ask ourselves, once once more, how far we should increase the rates in a context where it is more supply and international factors that are influencing inflation upwards.
This is where the balance to be found for public decision-makers between monetary tightening and home ownership measures. The ultimate goal is to avoid a slippage that would lead to the bursting of the real estate bubble in which far too many households in the country are plunged.
