If there’s one hint that Justin Beaudoin is selling his home — a two-storey townhouse on the edge of Barrie, Ont., replete with fresh laminate floors and refurbished kitchen cabinets — it’s that the main floor is remarkably tidy.
The couch cushions are plump and the surfaces lack crumbs. When a prospective buyer rings the doorbell, they might see a glimmer of their reflection in the newly refinished door.
If anyone rings the doorbell, that is.
Since Beaudoin put his home on the market early in June, few have visited and not a single offer has been made. The public relations manager fought tooth and nail for this property back in July 2020, when interest rates were low and bargain hunters scrambled for the best deals on single-family homes. But ever since the Bank of Canada started hiking interest rates in March of this year, few Barrie-dwellers have been in the mood to spend.
“Every time the Bank of Canada raises interest rates I want to bang my head against a wall,” said Beaudoin. “Because every time those rates go up, the longer I have to wait for someone to buy this place.”
For the past two years, pretty much anyone who owned a home could sell it for an outlandish asking price. Decrepit bathrooms, haunted attics, remote locations — no matter. Everything sold. In some rural areas, a new-found escape for urbanites with remote-work set-ups, home values grew by more than 50 per cent.
Now, that red-hot market feels like a distant memory. Since March, when the market peaked, national home prices have fallen 3.3 per cent while some Ontario cities have reported drops of 10 to 15 per cent.
Housing downturns are to be expected when interest rates rise, but the speed at which rates are climbing — with the central bank hiking rates at the fastest pace since 1998 — has economists and market-watchers projecting the largest real estate downturn in modern Canadian history.
Just how much will prices drop?
The Star asked Canada’s leading economists to outline their projections for the country’s real estate market in late 2022 and early 2023. Each of them predicted a decline of at least 10 per cent in home prices, with one bank — BMO — going so far as to forecast a 20 per cent decline by mid-2023.
That would lower the cost of the average Canadian home from $816,720 in March 2022 to $653,726 in March 2023. The average Toronto home, priced at $1.29 million this past March, would fall to $1.03 million next year.
“Given the exceptional deterioration in affordability — first due to the rapid run-up in prices, then by the rapid rise in interest rates — as well as the sudden turn in sentiment around the market, it’s difficult to see anything other than a meaningful correction ahead for Canadian housing,” said Doug Porter, senior economist at BMO.
By the end of 2022, BMO also expects home sales across the country to drop 23 per cent, with major declines in Ontario and British Columbia.
“Each city will have its own story, and may fare differently — driven both by how far it surged in recent years, and the outlook for the local economy — but it will be a challenging period for almost all major housing markets,” said Porter.
Most major banks have unveiled similar forecasts.
Beata Caranci, chief economist for TD, said the bank is projecting a 19 per cent decline in home prices by the end of the year, from the market’s peak in March. She also expects home sales to fall 33 per cent before rebounding in mid-2023.
At CIBC, meanwhile, economists anticipate home prices to decline about 15 per cent by the end of the year.
“When the Bank of Canada raises interest rates, it’s aiming to slow economic growth by taking a bite out of activity in the interest-sensitive parts of the economy, and housing is high on the list of sectors that are exposed to the impact of higher rates,” said CIBC senior economist Avery Shenfeld.
While the projections are stark, the declines would not entirely erase the gains that most homeowners made during the COVID-19 pandemic. National home prices rose 52 per cent between March 2020 and March 2022; even in the most severe forecasts, that would make houses 20 per cent more expensive than they were at the beginning of the pandemic.
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“This would not fully unwind the pandemic run-up in prices, but put a good-size dent into it,” said Caranci.
Still, the looming downturn in real estate would be bigger than any correction of the last four decades.
In a report released by RBC last week, economist Robert Hogue compared the bank’s projected downturn to those of 1981-82, 1989-90, 2008-09 and 2016-2018. Its predicted decline in home sales — 42 per cent by mid-2023 — is greater than any home sales decline in those four periods.
By early next year, Hogue said he expects average Canadian home prices to fall by at least 12 per cent.
It’s easy to see why. Even with double-digit declines in home prices, the high cost of borrowing is making it harder for prospective homebuyers to achieve their dreams of home ownership.
According to a recent report by Ratehub, Canadian homebuyers now need to earn an average of $18,000 more per year, compared to 2021, to afford a home and qualify for Canada’s mortgage stress test, depending on their location.
While, in June, home prices declined in cities like Toronto, Vancouver, Winnipeg, Ottawa and Hamilton, the income needed to purchase a home in those markets is now higher due to stress-test rates, the report noted. In Vancouver, B.C., for example, homebuyers needed an additional $31,730 in income to qualify for a mortgage.
“In every city, homebuyers require a lot more income to purchase the average home due to higher stress tests caused by increasing mortgage rates,” said Jaimes Laird, president of CanWise mortgage lender.
Despite the downturn, economists broadly expect the housing market to rebound midway through 2023.
A chronic shortage of supply has left Canada with the lowest number of property units per capita than any other G7 country, according to a 2021 report from Scotiabank. In June, the Canada Mortgage and Housing Corporation reported that the country needs 3.5 million more homes than planned by 2030 to make homes affordable again.
So long as supply stays low and demand bounces back with an influx of immigration next year, real estate prices will gradually increase again, said RBC’s Hogue.
“The unfolding downturn should be seen as a welcome cool-down following a two-year-long frenzy that put a huge financial burden on many new homeowners and made ownership dreams harder to achieve,” said Hogue.
“While a more severe or prolonged slump cannot be ruled out, we expect the correction to be over sometime in the first half of 2023 — lasting approximately a year.”
In Barrie, Beaudoin’s home-selling woes mirror some of the forecasts laid out by the economists.
Early in June, when he put the townhouse on the market, he listed it for $699,000 — a reasonable asking price given the lofty renovations, he reckoned. By July, after the Bank of Canada raised interest rates by a full percentage point — the most aggressive hike since 1998 — Beaudoin had sliced his listing by $50,000, reducing the asking price to $649,000.
Should the central bank raise interest rates again — and they all but certainly will, according to most projections — Beaudoin said he might cut the price to $600,000.
Beaudoin bought the home for $363,000 in July 2020, which would bank him a tidy return should he sell it for nearly double the price. But the price cuts, from $699,000 in June to a possible $600,000 later this year, would amount to a 14.2 per cent decrease in his home’s value, within the 12 to 20 per cent declines that economists are expecting.
“My plan was to stay patient and ride out the downturn, even if it takes a year to sell the place,” said Beaudoin, who hopes to buy a home in Peterborough, Ont., with the capital he collects from his sale in Barrie.
“But barely two months have passed since the listing went up — and I’m already impatient.”
Jacob Lorinc is a Toronto-based reporter covering business for the Star. Reach him via email: firstname.lastname@example.org
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