As we step into a new month, it’s time to take a closer look at the Canadian real estate market and recap the key trends and developments that unfolded in April 2023.
The real estate landscape in Canada has always been dynamic, and April was no exception. From FOMO coming back, to looming mortgage payment crisis fluctuations, April provided valuable insights into the state of the Canadian real estate market.
In this blog post, we’ll delve into the notable highlights, statistics, and observations that emerged during this period, giving you a comprehensive update on the current state of affairs in Canadian real estate.
Market Activity and FOMO are back!
We’ve seen this movie before and not too long ago. In April, FOMO (fear of missing out) returned to major Canadian real estate markets in full force.
Buyers are back with a vengeance. The sellers…ummm. not so much. With record-low inventories of housing, bidding wars, overflowing open houses, and mad lineups at builder’s sales centers are back. With over a year of pent-up demand, it’s easy to feel what buyers are feeling. The “bargains” that everyone held out for over the last year have not really materialized, and the news cycle is back to showing people fighting for homes like they are going out of style. Naturally, buyers want to get in on the action before prices are on the upswing again.
How mad is the FOMO? So much so, that the Ontario government is pushing a “cooling off period” for resale real estate.
What’s behind the bidding wars? Low, low, low inventory. In fact, record lows of inventory, coupled with high buyer demand and FOMO. However, demand won’t necessarily translate to more transactions in what is typically the peak of the real estate season in Canada. The reason, once again, is lack of inventory. Just take a look at the example below from John Pasalis:
The pendulum has swung too far the other way
So why are more sellers are not putting their homes up for sale?
Has the market pendulum swung the other way? From buyer fear to seller fear?
It’s too early to tell, but it certainly looks this way. We may have a contingent of would-be sellers who are watching the market closely and want to sell for top-dollar. They believe in timing the market. Naturally, those sellers will choose to wait another couple of months to see what’s going on with the market before calling up their agent and getting their property on the market. Other would-be sellers, likely can’t be bothered to sell in this market, which is the opposite of FOMO. They just don’t want to deal with the costs of selling and are perhaps spooked by high mortgage rates if they were considering moving up the real estate ladder.
Another rate hike on the way? Maybe…maybe not!
The annual rate of inflation rose slightly in April as Canadians paid more at the gas pumps, bucking a streak that had seen price pressures easing year over year since the summer in Canada. The labour market remains strong as well.
The inflation rate was 4.4 per cent last month, up from 4.3 per cent in March. Does this mean we’ll see a the Bank of Canada increase rates again? That’s always a possibility, however, some economists are saying the increase is “just a blip”. What it does mean, however, is that rate cuts may be farther away in the distance and the current rates are here to stay fr a while. In fact, with recent increases in Canadian bond yields, fixed mortgage rates have already risen in May.
The fight against inflation is a virtuous loop
Veteran mortgage broker, Ron Butler, calls the fight against inflation a “virtuous loop”. The Bank of Canada Rate Increases that are meant to kill inflation, are in fact causing inflation. According to Butler, It’s simple: the Bank of Canada raising their Rate causes mortgage rates to increase which increases mortgage payments and also pushes up rents = higher Shelter Inflation. Even if you’re not a homeowner, you’re not sheltered either. In some regions rents have increased 20% in one year due to higher holding and debt service costs for landlords.
Call it a virtuous loop or chicken and egg problem. A fix applied to correct the economy can easily break something else. Policy makers and top economists are still forecasting a “soft landing”, but there’s just no easy fix to get the housing market balanced and reduce the burden on homeowners and renters, alike.
We’re not out of the woods…yet!
Rising interest rates have not been yet been felt throughout the system yet. While we’ve been on a rollercoaster ride with buyers pulling out of the market and prices dropping across most real estate markets, we’ve not yet seen the end of this cycle. In fact, some argue that the worst has yet to come. What does this mean (and why)?
While only about one-quarter of mortgage holders have a variable rate loan, the effect of rate hikes has been dramatic. Rate hikes are adding thousands of dollars to the periodic payments in many cases and extending the life of the loan by years if not decades.
In 2019, less than one-fifth of new mortgages were amortized for longer than 25 years. Last year, almost half of new loans were stretched out over a longer period.
Existing mortgages, many of which have been insulated from rate hikes so far, will start to feel their impact in the coming years as their renewal comes up, and the banks are worried about what might happen when they do. To simplify it even further, if Fred and Wilma bought a property in 2020 and borrowed $750K at a 5-yr fixed rate of 1.8%, their monthly payment, based on a 30-year amortization would be $2,695. When their 5-year term is up, in 2025, assuming the best rate at the time of renewal is 5%, their monthly payment would go to $4,003. That’s a significant increase that would financially stress-out most homeowners and investors.
Bottom line: In the next 2 years, 55% of mortgages in Canada will be renewing. Most of which will renew at a considerably higher rate, causing mortgage payments to rise by as much as 50% or more.
Fighting the supply crunch
By now, the recurring theme is clear. We don’t have enough housing inventory in Canada to house our current population, let alone millions of immigrants who are moving to Canada over the next few years. So how do we get more housing units? We’re already seeing early signs of creating solutions and legislation change to get more housing units built.
The housing crisis in Toronto has been an ongoing concern, with skyrocketing prices and limited availability. Put simply, there’s not enough housing in Toronto to meet current and future demand.
To address this issue, the Toronto City Council voted and approved a groundbreaking proposal that could allow for the construction of four-unit, or fourplexes as they are more commonly known. Learn more about the plan here.
Converting office towers in Calgary
Could converting vacant offices into residential dwellings be the answer to Canada’s endless shortage of homes? Calgary has completed its first office conversion to affordable housing units.
Mall parking lots are turning into condo projects
From Yorkdale to Fairview Mall to Square One to Sherway Gardens, you don’t have to look far in the Greater Toronto Area to find a mall with big redevelopment plans in the works.
Experts say mixed-use developments in and around existing malls are taking off in the GTA and are leading a trend as the region faces a housing crunch with demand outpacing supply.
The bottom line
In April, the Canadian real estate market saw a return of FOMO, with buyers back in full force. Record-low housing inventories, bidding wars, and overflowing open houses have become common. Sellers, on the other hand, seemed hesitant to list their homes, resulting in low inventory levels. The fight against inflation has created a “virtuous loop” where rate increases meant to curb inflation are causing inflation through higher mortgage payments and rising rents. As interest rates rise, mortgage holders will start feeling the impact during renewals. Innovative solutions are emerging, such as the proposal to allow fourplex construction in Toronto and the conversion of vacant offices and malls into residential units. The Canadian real estate market remains dynamic, with upcoming mortgage renewals and ongoing supply challenges.
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