Did you notice it? In the news, when it comes to the economy from a broad angle, it’s going badly. And if it goes well, we will not fail to point out that it is a bad omen. It can only go wrong.
In short, no way to have peace of mind.
Take real estate. Last year, we made a big deal of overbidding, ridiculous house prices, inaccessibility.
What have I seen lately everywhere? “A Historic Correction Awaits Canadian Real Estate”. Admit that it’s scary.
RBC Bank anticipates a 20% correction in the country over the next year.
BMO Capital Markets warned it might be worse.
These scenarios are more alarming than the one presented by Desjardins in the spring. The financial cooperative predicted a 12% decrease in real estate prices in Quebec by the end of 2023.
The RBC and BMO analyzes include Toronto and Vancouver, where the falls might be quite severe.
What does this mean for real estate owners and for those who aspire to become one?
Not really a drop
Let’s put things into perspective.
According to the barometer of the Association professionnelle des courtiers immobiliers du Québec (APCIQ), the median price of single-family homes was $265,400 in the second quarter of 2019 in Quebec. Three years later, it reached $448,600. This represents an increase of 69%.
Now imagine that the value of real estate drops by 20% within a year. The median price of single-family homes would then drop to $359,000, a drop of nearly $90.00.
Even following this so-called “historic” correction, real estate will still be 35% more expensive than it was in the second quarter of 2019.
For the vast majority of owners, it won’t change anything. They will just be a little less rich on paper than they were briefly.
Who is at risk?
“Yes, but whoever bought at the top, won’t he find himself in trouble?” you will ask.
We think of all those who acquired a first property last spring. In the second quarter of 2022 (April to June), the median price of single-family homes was 20% higher than during the same period of the previous year. In condominiums, we saw a jump of 14%.
As long as these new owners are able to repay their mortgage, the situation is not a problem, life goes on. On a psychological level, it is not pleasant. The prospect of seeing the equivalent of your down payment (accumulated over the years) evaporate in a few months certainly gets on your nerves, especially since the mortgage is not going down.
It is not the cooling of the market that poses the most serious risk for them, but the accelerated rise in interest rates, which directly affects the portfolio.
And what regarding those who, at the time of purchase, paid the minimum down payment of 5%? Well, they might find themselves in this very uncomfortable position where the value of their property will be less than their mortgage.
Again, as long as they honor their commitments to their lender, nothing will happen. They do not have to fear pressure from the bank.
The situation is no less risky. In a scenario where you have to quickly dispose of your property (following a separation, for example), financial losses are to be expected. In the worst case, homeowners may have to surrender their home to the creditor. If the fruit of the resale does not cover the entire loan, it will be up to the mortgage insurance to wipe the bill.
Patience, first buyers
For aspiring buyers, the context is not regarding to improve. On the contrary, the rise in interest rates has considerably reduced access to the real estate market.
Prices have to come down to compensate for higher financing costs. According to Hélène Bégin, economist at Desjardins, this window will not arise before the end of 2023, in the best case.
Once at the bottom, we can hope for a slightly more affordable market, at least for the trouble. Who knows, maybe it will coincide with a reduction in interest rates.
Before seeing a favorable alignment of the planets, aspiring buyers may have to wait another two years.
