All signs point to it. The residential real estate market is on the way back to a certain normality. But it is still difficult to measure the real impact that the historic deterioration in the level of affordability observed during the pandemic will have in a context of accelerated rate hikes and a general outbreak of inflationary fever.
A severe correction in the residential real estate market still does not appear in the charts. We are still looking at a deceleration in demand and price growth, with higher interest rates and the marked deterioration in affordability of property curbing the momentum of new buyers.
The standardization process is ongoing. According to April data from the Association professionnelle des courtiers immobiliers du Québec, property sales in Greater Montreal experienced a sixth straight monthly decline last month. As for the supply of properties, the number of listings in effect at the end of the month recorded a fourth monthly increase in a row. National Bank analysts believe that the slowdown in demand in recent months is entirely due to a decrease in transactions of single-family properties, which have reached their lowest level since 2009. But to see that the lack of offers of this type of property on the market now combine the effect of the rise in interest rates and the significant surge in prices since the start of the pandemic.
Across Quebec, total sales are down 18% year-to-date in April, down 19% in single-family homes and 15% in condominiums. But active listings are also 20% and 26% lower respectively, while the time to sell was around 36 days in April, down some 15 days year on year. This resulted in an increase in the median price of around 20% in the interval.
All of this is against the backdrop of “the most unfavorable level of affordability on record,” write analysts at the National. For its part, the Desjardins Group affordability index continued to contract in Canada in the first quarter of 2022, for a fifth quarter in a row. “Over the past year, growth in the average selling price of a property has accelerated in most markets across the country, supported by strong demand and limited supply. At the same time, after-tax household income rose slightly during this period.
Average price of $500,000
Desjardins Senior Economist Hélène Bégin recalls that “the average price of existing properties approached $500,000 in Quebec during the first quarter of 2022. This is an annual increase of more than 15% which has been maintained since mid -2021 after exceeding 20% in the first quarters following the start of the pandemic”. To add that “although the variations compared to last year remain sharp, those observed from one month to another seem to be weakening, probably one of the first signs that the period of effervescence draws to an end”.
“Next year, a downward price adjustment seems inevitable […]. The slowdown in demand will limit situations of multiple hasty offers and put an end to the almost generalized phenomenon of one-upmanship. Selling prices should then approximate the real value of the properties. »
Weak inventory of properties for sale, deterioration in accessibility, first-time buyer fatigue, rising rates, inflationary pressure and growing uncertainty in the face of economic conditions… Everything combines to militate in favor of easing the pressure on the prices. But we note, here and there, an attenuation leading to a deceleration in the second half of 2022 followed by a slight decline in prices next year. Around 5%, according to Hélène Bégin. However, this must be seen in the perspective of an average jump of 30% since February 2020. The recovery in immigration, a labor market that remains tight and the sharp rise in construction costs should provide support, we believe.
On the other hand, the high indebtedness of Canadians, who have one of the highest debt/disposable income ratios among inhabitants of developed countries, means that they are particularly sensitive to rising rates. At Moody’s, we see the Bank of Canada’s key rate touch 2.5% at the start of… 2024. It should end the year “at more than 2%”, rather targeting Hélène Bégin. This should push the variable mortgage rate and the five-year fixed rate around 4%-5% somewhere in early 2023.
According to figures from the economist, the average monthly payment in Quebec for a mortgage with a 25-year maturity was just under $1,200 at the low point in 2020 and currently fluctuates between $1,700 and $2,000 depending on whether the rate is variable. or fixed. In both cases, the average monthly payment would reach $2,100 next year. And that’s assuming a 20% down payment.
Above all, they are more numerous among economists to now see the target rate reach 2.25% at the end of the summer, and 2.5% at the end of the year. With the latter rate, we would find ourselves 75 basis points above the 1.75% rate observed before the pandemic, and with an increase of 225 basis points this year.