Still tight labor market and immigration scramble forecasters’ crystal ball. The return to a certain balance on the residential market is still in the cards. In Quebec, it could even become (slightly) favorable to the buyer again… somewhere in late 2023 or early 2024.
The housing market moved more fully into its downturn in the first quarter. Equifax Canada is seeing a 42% drop in new mortgage originations from the first quarter of 2022, “the lowest volume since 2014.” Much of this sluggishness can be explained by the drop in the percentage of first-time buyers in the market. “On average, first time home buyers in 2023 are paying more than $900 more in monthly mortgage payments than their counterparts in 2020. [Pour eux] the average loan amount granted now exceeds $400,000,” adds Equifax.
And affordability is barely improving. National Bank analysts point out that after hitting its most unaffordable level in more than 30 years, the mortgage payment as a percentage of income fell 5.4 percentage points in the first quarter from its peak, but to remain at a still high level of 60.9% at the Canadian level.
This “improvement” reflects a decline in residential real estate prices for the third consecutive quarter. This decline reached 7.3%, “the largest drop in a generation”.
Accessibility is still problematic. In Montreal, the annual salary of a household to acquire a dwelling other than a condo at the representative price of $542,350 is $130,200, the institution calculates, according to a mortgage payment/pre-tax income ratio of 32%. It takes 45 months to raise the required minimum down payment, at a savings rate of 10% of pre-tax income, resulting in a mortgage payment as a percentage of income of 46.2%. For a condo at a representative price of $403,300, the required annual salary would be close to $97,220, which would require 31 months to accumulate the minimum down payment and would imply a mortgage payment ratio of 34.4%.
In Quebec City, a household would need an annual salary of $85,450 to purchase housing other than a condo, at the representative price of $350,450, which would require 27 months to constitute the minimum down payment and would represent a mortgage payment/income of 30.4%. For a condo with a representative price of $256,230, an income of $61,770 and an accumulation period of 20 months would be required, for a mortgage payment at 22% of income.
We are therefore far from an optimal ratio. By way of comparison, all types of housing combined, the weight of the mortgage payment (at a five-year fixed rate for a 25-year amortization) reached 42.6% in Montreal in the first quarter, compared to an average of the last 20 years of 30.7%. In Quebec, it is 30.2% against an average of 23.1%. And in Ottawa/Gatineau, it reaches 43.8% against an average of 32.1%.
Back to balance
Nevertheless, in this second quarter, we are seeing renewed activity on the resale market, fueled by spring demand. The latter is still favorable to sellers, but tends towards equilibrium, with a slight upturn in the number of properties for sale resulting in some price stabilization. Although in Quebec the renewed vigor is more timid.
Across Canada, the housing market has been showing signs of rebounding for four months. The rapid recovery in sales while the supply of properties is at a 20-year low translates into tighter market conditions, propelling the average price up 10.7%, including a gain of 5.7 % in April only. All of this being fueled by activity from increased immigration. “In Quebec, the average price increased by only 2.5% during the same period and even remained stable in April,” write Hélène Bégin, senior economist, and Maëlle Boulais-PRésault, economist at Mouvement Desjardins.
This contrast must, however, be seen in the perspective of a lesser price correction in Quebec from the spring of 2022 until the beginning of 2023. From peak to trough, it amounted to 20.8% in Canada, compared to 7 .3% in Quebec.
But this revival would only be temporary, the time of spring, or even the beginning of summer. If the first phase of correction echoed the robustness and rapidity of the rise in interest rates, a second phase should begin in the second half of the year, caused this time by an expected deterioration in the labor market under the effects of the recession. . Currently at 4%, not far from its historic low of 3.9%, the unemployment rate in Quebec should rise to around 6%, believe economists at Desjardins.
“The demand for properties should therefore weaken in the second half of the year, while the supply will continue to rise. The market will thus become more balanced and it could even tip slightly in favor of buyers. ” Nothing less !
According to the sketched scenario, the average price would fall by around 5% from the summer until the very beginning of 2024, inflating the decrease, during this two-step correction, to 10% between the peak of February 2022 and the trough at the turn of 2024. Economists are thus correcting their previous forecasts which forecast a continuous drop in prices of 17% until the end of 2023, they point out. By adding to all this the beginning of a decline in interest rates expected at the turn of 2023…