November 2022 saw 38.9% fewer home sales compared to November 2021 and 13% fewer home sales compared to the 10-year average pre-pandemic, according to the latest statistics from the Canadian Real Estate Association (CREA).
The value of homes being sold is also dropping as the demand for homes continues to fall.
What’s driving this downward trend, though? Why is real estate down? Below, I’ll explain how higher interest rates are affecting home sales, outline how much the real estate market has declined year-over-year, and outline how it could affect you.
HIGHER INTEREST RATES FOR HOME BUYERS
Canada has seen elevated levels of inflation, as the CPI rose by 6.9% compared to last year. To combat this, the central Bank of Canada implemented a quantitative tightening plan designed to reduce spending and borrowing.
The central bank does this by increasing the overnight interest rate imposed on banks. Since private banks borrow money from the central bank, these rate hikes are passed onto consumers, resulting in:
- Higher mortgage rates
- Higher interest rates on small business loans
- Higher credit card rates
On December 7, the Bank of Canada announced that it would increase overnight interest rates by 50 basis points, marking the seventh consecutive rate hike in 2022. This caused the interest rate to increase from 3.75% to 4.25%.
Banks and lenders responded to this rate hike by increasing their prime rate by 50 basis points to 6.45%.
The prime rate represents the base lending rate used by banks.
While mortgage rates may be higher for individual borrowers, those with good credit and financials (prime borrowers) can expect to pay the prime rate when they apply for a mortgage.
When you consider the large sum of money required to buy a home, 6.45% is a fairly high-interest rate.
For example, at this rate, a $500,000 home loan would incur around $32,250 in interest over one year. While the borrower could refinance their mortgage later when prime rates are lower, they’d still end up paying a lot of interest upfront.
The central bank has been steadily hiking rates since March 2022, as seen here:
- March 2 - 0.50% overnight rate (+0.25% change)
- April 13 - 1.00% overnight rate (+0.50% change)
- June 1 - 1.50% overnight rate (+0.50% change)
- July 13 - 2.50% overnight rate (+1.00% change)
- September 7 - 3.25% overnight rate (+0.75% change)
- October 26 - 3.75% overnight rate (+0.50% change)
- December 7 - 4.25% overnight rate (+0.50% change)
Additionally, analysts from the RBC believe that the Bank of Canada may continue increasing their rates moving into early 2023, which could increase mortgage rates even more.
All of this means that Canadians are less compelled to take out a mortgage and buy a home. As a result, many are continuing to rent or remain in their existing homes until interest rates eventually decline.
This has caused the demand for homes to decrease dramatically compared to late 2021. The law of supply and demand shows that decreased demand usually correlates with decreased prices.
HOW MUCH IS THE REAL ESTATE MARKET DOWN IN CANADA?
Based on reports and charts from the CREA, here’s a look at how much the average cost of real estate has changed in Canada since 2021.
The national average home price is down 12% between November 2022 and the same month last year.
Toronto
The Greater Toronto Area saw 49% fewer home sales in November 2022 compared to the previous year, with residential home prices falling by an average of 5.5% from November 2021.
Vancouver
Although the average home price has remained similar in Vancouver, the Greater Vancouver Area saw 52.9% fewer home sales in November 2022 compared to November 2021 and a decrease of 10.2% in average home prices over the past six months.
Ottawa
Ottawa’s average home price fell by around 5% year-over-year and saw 42% fewer properties sold in November 2022.
HOW FALLING REAL ESTATE PRICES COULD AFFECT CANADIANS
A depressed real estate market can affect Canadians in several ways. Here’s what you should know.
Depressed construction spending
As Canadians purchase fewer homes, developers are pausing new home and apartment construction. This, in turn, may result in a depressed construction market, which can negatively affect blue-collar workers, material suppliers, and small contracting businesses that rely on the construction market.
It’s cheaper to buy a house
If you’re in the market to buy a home, the good news is that it may be cheaper to purchase a home. While interest rates are high, the decreased demand for homes has driven prices in many markets down.
Will real estate continue to fall in 2023?
The future of the real estate market moving into 2023 is up in the air at this point. If the Bank of Canada continues to increase its rates, then the real estate market will likely remain depressed. However, if rates are reversed, then the housing market could see a slight reversal as borrowers receive more favourable lending terms.
Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.
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Correction:
The key rate increase in March has been corrected to 0.25 per cent, rather than 0.50 per cent.
