Housing market is showing signs of life, but it is too early to celebrate a recovery
The rise in mortgage rates poses unexpected new risks for many borrowers.
According to Canadian Real Estate Association data, the month-over-month decline in housing sales was finally reversed in October, when sales were 1.8% higher than the previous month (CREA).
Those who are pessimistic will point out that October 2022 sales were still 36% lower than a year ago, but the month-over-month increase is significant because it is the first increase in sales volume since February.
It should be noted once more that ultra-low mortgage rates resulted in higher-than-usual sales in 2020 and 2021. The rapid and steep rise in mortgage borrowing costs has reversed the high-sales trends, possibly returning housing sales activity to pre-pandemic levels.
In essence, what low rates give, high rates take away.
However, a longer-term analysis of the data suggests that October sales activity was lower than before the pandemic. Indeed, sales last month were 15% lower than the pre-pandemic, 10-year average for October, implying that rising mortgage rates have done more harm than simply reversing the pandemic-driven surge in housing sales.
Furthermore, the quality-adjusted MLS Home Price Index (HPI) fell by 1.2 percent in October compared to the previous month. In addition, the national average housing price fell 9.9% year on year. The price declines are far greater than the February peak. Nonetheless, October sales and listing activity point to the start of a market recovery. In October, sales increased and new listings increased by 2.2% over the previous month. Although the increase in sales and new listings is modest, these signs are encouraging and, in the absence of other unexpected shocks, could lay the groundwork for a more robust recovery once buyers and sellers on the sidelines decide to return to the market.
A longer-term view of housing prices is also encouraging. For example, the seasonally adjusted national MLS Home Price Index benchmark price in October was $756,200, down from the same time last year and even lower than the peak price observed in February, but up 38.8 percent from three years ago.
If the housing bust meant a drop in housing prices that would wipe out the gains made in previous years, such a drop has not yet occurred in Canada. The HPI benchmark prices were higher in October than three or five years ago in all major housing markets. Given the heterogeneity of housing markets, a three-year comparison of housing prices shows more significant gains for markets that had not peaked before the pandemic. For example, October prices in small satellite towns that became popular during the pandemic, such as Fraser Valley, B.C., or Barrie, Ont., are 55% higher than three years ago. Similarly, prices in Greater Moncton, N.B., were 75% higher.
Those who are bullish on the markets, such as CREA’s senior economist Shaun Cathcart, believe “the slowdown in Canadian housing markets is winding up,” while those who are bearish predict even higher declines in sales and prices.
It is too soon to begin celebrating a housing market recovery. Mortgage rate increases pose unexpected new risks for many borrowers, particularly first-time homebuyers who chose variable-rate mortgages with fixed payments. Because of the increase in mortgage rates, they may be required to pay up to 20% more in monthly mortgage payments.
According to Bank of Canada estimates, 13% of all mortgages in Canada have reached the so-called trigger rate, where the monthly mortgage payment only covers the interest payment and does not contribute to the owed principal amount. If mortgage rates continue to rise, the proportion of vulnerable borrowers could rise to 17%.
Canadians with variable-rate mortgages and those whose fixed-rate mortgages are about to expire may need to dig deeper into their savings to cover any increase in mortgage payments.
