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  • Writer's pictureRoyal LePage Estate Realty

Homebuyers remain determined while sellers step back in response to additional interest rate hikes

Updated: Oct 4, 2023

Home prices are expected to hold steady through the remainder of 2023, despite an anticipated drop in activity following a second consecutive increase in BoC’s overnight lending rate. The real estate market is not all doom and gloom. Buyers and Sellers have enjoyed so much growth over time that there is now a lot of anxiety over the drop in home prices in Canada. Homeowners just aren’t used to seeing their values decrease, and it can be unnerving, but it is important for homeowners to realize that the frenzy that occurred during the pandemic lockdowns and the subsequent year was an anomaly, and home prices are still on the upswing if compared to pre-pandemic values. Supply and Demand still reigns and there will always be Buyers looking for a place to live as long as we are in a housing shortage (which is not changing anytime soon). Sellers should rest assured that the outlook looks positive for them, but only as long as they are comparing apples to apples when it comes to their expectations.

Read Royal LePage’s second quarter release for national and regional insights. Second quarter highlights: National aggregate home price remained almost flat year-over-year in Q2 2023 (-0.7% over Q2 2022) and increased 4.0% quarter-over-quarter (second consecutive quarterly increase)

  • The aggregate price of a home in Canada in Q2 2023 sits just 5.6% below the peak reached in Q1 of last year

  • 94% of regions in the report posted quarterly aggregate home price appreciation

  • National year-end forecast updated. Prices in Q4 2023 are now expected to rise 8.5% over the final quarter of 2022; essentially flat over the next six months

  • The chronic shortage of housing supply, due in part to sellers’ hesitancy to list, continues to put upward pressure on home prices

  • Royal LePage urges officials to quickly increase support for more development, including affordable, purpose-built rental buildings

According to the Royal LePage House Price Survey released on July 13, 2023, the aggregate price of a home in Canada decreased modestly by 0.7 per cent year-over-year to $809,200 in the second quarter of 2023, indicating that nationally, the real estate market is close to the point where it will have recovered fully from 2022’s post-pandemic market correction. On a quarter-over-quarter basis, the aggregate price of a home in Canada rose 4.0 per cent in Q2. This was the second consecutive quarter to show positive growth following a rapid decline in prices over the last year as a result of the Bank of Canada’s aggressive interest rate hike campaign, which began in March of 2022.

“Almost all Canadian homeowners have seen the value of their properties appreciate handsomely over time. A few who purchased at the tail end of the pandemic-fueled real estate boom saw the value of their homes drop below purchase price during the subsequent market correction,” said Phil Soper, president and CEO of Royal LePage. “We are close to that pivotal point where people who purchased at the peak would break even if they sold today.

“The Bank of Canada’s prolonged series of interest rate hikes has changed where and how people live. It has pushed some buyer hopefuls to choose less expensive housing types or neighbourhoods. Others have chosen to relocate to more affordable markets across their province or across the country. And, some buyers have been pushed to the sidelines indefinitely,” Soper continued. “Economic uncertainty has caused some potential sellers to reevaluate their plans as well. The worry that they will be unable to find the move-up home they need in today’s tight market is a major concern. Further, there are those who secured fixed-rate mortgages at generational lows of two per cent or even less, who are understandably reluctant to wade back into a market with substantially higher borrowing costs. Fewer sellers mean fewer listings, which adds further pressure to our chronic shortage of inventory. Access to affordable housing in Canada will continue to be a major social issue.”

The Royal LePage National House Price Composite is compiled from proprietary property data nationally and in 62 of the nation’s largest real estate markets. When broken out by housing type, the national median price of a single-family detached home declined 2.0 per cent year-over-year to $841,900, while the median price of a condominium remained essentially flat, decreasing by just 0.4 per cent year-over-year to $586,900. On a quarter-over-quarter basis, the median price of a home in these property segments rose 4.1 and 2.7 per cent, respectively. Price data, which includes both resale and new build, is provided by Royal LePage’s sister company RPS Real Property Solutions, a leading Canadian real estate valuation company.

Additional interest rate hikes

After two consecutive rate holds in March and April, the Bank of Canada announced last month that it was raising interest rates by another 25 basis points, before announcing a further quarter-point increase on Wednesday. The central bank’s overnight lending rate now sits at 5.0 per cent.

“Despite the central bank’s decision to start raising interest rates again, many buyers are still in the game. Demand remains strong, particularly among those who have secured a rate hold,” said Soper. “Buyers who are determined to make a purchase this year have accepted the reality of higher initial carrying costs, rationally surmising that rates are at or near peak and will become more affordable before long.”

Some buyers may have to adjust their expectations, widen their geographical search parameters or acquire a property that is smaller or more affordable in order to be successful.

Royal LePage’s 2023 Canadian First-time Homebuyer Survey found that 34 per cent of first-time buyers in Canada purchased a home in a more affordable region or neighbourhood than they had originally planned, and another 32 per cent purchased a smaller home, due to the impacts of current economic conditions, including the increased cost of living and lending rates.

“Contrary to some buyers who appear undeterred by the central bank’s decision to restart its rate increase campaign, many would-be sellers who do not have a critical need to move imminently have hit the pause button again, further exacerbating the inventory shortage,” added Soper.

With record-setting immigration targets in place for the next several years, and housing starts on the decline across the country, due to labour shortages and higher construction and borrowing costs, pressure on home prices continues to build.

Nearing the break-even point

Approximately one-third (32%) of regions in the report posted year-over-year aggregate price gains in the second quarter, and only four regions reported quarterly declines.

“At this time last year, the market correction was in full swing, and home prices had been declining from the peak for several months. A theme I heard often was, ‘Why buy today, when I may be able to buy the same home for less tomorrow?’ As some doomsday forecasters predicted the economic collapse and sharply rising unemployment, the pull-back in demand was understandably extensive, causing home prices to drop right across the country,” said Soper. “Yet the housing correction was short-lived. Across Canada, a return to pre-pandemic levels of demand, and the continued lack of supply, has been applying upward pressure on prices once again.”

Just as the market correction unfolded at various times in different regions across the country, so too has the recovery. The aggregate price of a home in Canada remains 5.6 per cent below the peak reached in the first quarter of last year.

The aggregate price of a home in the Greater Toronto Area, Canada’s largest and second-most expensive real estate market, posted a slight increase year-over-year in the second quarter, however, remains 7.0 per cent below the region’s peak recorded in Q1 of last year. Similarly, the aggregate price of a home in Greater Vancouver, the country’s most expensive market, remains 6.9 per cent below the region’s peak, also recorded in Q1 of 2022. In the Greater Montreal Area, where home prices reached their highest level a little later, in Q2 of 2022, the aggregate price of a home sits just 2.4 per cent below the peak. Of the country’s three largest urban centres, the GMA experienced the shortest correction period. In the prairie provinces, prices also reached their peak in the second quarter of 2022, while some parts of Atlantic Canada reached their peak in Q2 and others in Q3 of last year.

Rental markets heating up

The increased cost of borrowing is also having a significant impact on rental markets across the country. Faced with higher carrying costs, landlords are passing those expenses on to their tenants by raising rent prices. In addition, would-be buyers who were unable to qualify for lending or who have been priced out of the resale market are moving to, or remaining in, the rental market, which is adding additional pressure on an already low supply of available rental units. According to Statistics Canada’s latest Consumer Price Index, rent in May was up 5.7% over the same period last year.

“In some cities, paying rent has become as expensive as making a monthly mortgage payment. The difference for many young people is the ability to acquire a down payment – whether through savings or with the financial assistance of parents or relatives,” said Soper. “It is essential that our governments increase support for the development of affordable, purpose-built rental buildings, especially in cities like Toronto and Vancouver, where it is becoming increasingly unaffordable for young people to establish themselves without financial help.”

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