The most positive financial development for 2022 so far has been the end of the housing craze.
Home prices have gone up a lot, very quickly. A lot of money has been made in real estate and a lot of economic activity has been created, but we need to step back to restore a degree of economic rationality.
Expect some ugliness as we move from the boom to what lies ahead in the housing sector – a recession, a mild downturn or a crash. Canadians have invested a lot in housing, both financially and emotionally. Seeing housing shrink will not bring out the good for the people.
Prediction for the first to be judged: the people who bought at the top of the market. We already have the phrase “buyer’s remorse” circulating in media stories.
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The median resale home price peaked at $816,720 in February and has since fallen to $746,146 in April. Average prices last month were more than 50 percent higher than at the same time in 2020, and 7.4 percent higher than in April 2021. But housing has certainly leaked. Economists say a 10-20% price drop is possible.
Recently, a month or two ago, we were living in a bidding real estate market until we ran out. Prices kept going up no matter how much people were paying, so there’s no bad deal if it were to enter the market.
This was intergenerational thinking, not the whim of a young, inexperienced generation trying to get into the housing market. Consider all parent money spent on down payments for first-time buyers. A CIBC Economics study last fall said nearly 30 percent of first-time buyers got a down payment from parents, with the average value of those gifts being $82,000.
The inevitability of home ownership was also enhanced by the evolution of homes into a commodity to invest in, such as oil, minerals, or gold. In this housing finance, investment companies bought homes to rent and new projects emerged to allow people to buy shares in homes and buildings.
Housing didn’t need a cheerleading department, but it had a real estate industry department that was adept at how to explain the fundamental problem of rising home prices long before we got in. Justified immigration rates. The lack of supply was the problem. The same goes for the red tape that hinders the construction of new housing.
In Canada, every social tip is asking young people to buy a home. Your parents don’t want you to miss out, your friends are buying and sharing on Instagram for their new life and the renters are being abused because they are paying the landlord’s mortgage. In fact, renters pay a legitimate cost of the shelter and save a package by not having the money they can use to invest.
The excitement about housing was something of Toronto and Vancouver. The obsession later spread to places within walking distance of these urban centers and, in the COVID-19 pandemic, to remote communities offering bigger homes for less money. A national consensus emerged: housing was an unstoppable force. If you can buy, you have pushed to get a home.
Skeptical voices spoke about housing along the way, some in real estate. But housing prices have pushed everyone and everything in their path, including a global pandemic. Certainly, housing was an exception to the investment’s law of gravity, which states that everything that goes up in price must go down at some point.
Housing fought the law, the law triumphed. What now?
Some points for everyone to take into consideration:
- Higher interest rates make buying a home now more expensive compared to earlier this year, even with lower prices.
- Immigration levels will help maintain demand for housing.
- The labor shortage will restrict the construction of new housing to meet this demand.
- Staying in the home for five to ten years puts you in a position to see any near-term price drop turn into the next phase of housing.
- Buying a home you could afford at peak price levels was just a mistake if you were planning to flip it.
Lower housing prices is good for the country. It doesn’t have to be bad for new buyers.
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