Canada’s real estate bubble has been greatly boosted by low interest rates, and prices are adjusting as interest rates surge. Home prices rose sharply through March as cheaper credit flooded the mortgage market. As interest rates rose, credit was constrained and began to have the opposite effect. Home prices are currently falling significantly and could fall further as interest rates rise further.
Canadian property prices down 15% from peak
Canadian real estate prices plummeted as market sentiment collapsed. Typical home prices fell from a peak of $868,300 in March 2022 to $735,400 in October. A 15.3% decline since the March 2020 rate cut has wiped out almost half of the gains.
Canadian real estate price growth
Typical house price changes across Canada since March 2020.
Source: CREA; Better Housing.
Canadian mortgages are being aggressively curbed to normalize
Canadian mortgage rates have also surged since home prices peaked. Borrowers saw their borrowing power drop by 32.2% today, in contrast to February 2022 lows. Declining mortgage leverage and falling home prices are no coincidence.
Assets have value that can be liquidated. In other words, a regular stream of buyers must be both willing and able to pay the current price. Cheaper credit means more leverage, making it easier to absorb price increases. As credit increases, leverage decreases, making it more difficult to pay large amounts. To secure the flow, prices must fall or buyers must become wealthier.
In Canada, we are now seeing the exact opposite mechanism that has boosted demand. Mortgage rates were cut and credit lines increased by 17% at the peak of the cycle. Predictably, this sparked a gold rush, with investors displacing housing end his users. Rising prices had a second boost by shifting cheap credit to well-funded investors. Much of this should be corrected as interest rates rise.
Rising interest rates Slowing home price growth Falling
Rising interest rates lead to a collapse in demand, and interest rates are expected to rise further. At least 50 basis points (bps) of rate hikes are expected this month. This will reduce credit service capacity by another 5%. It is a reasonable assumption that there is a risk that house prices will fall further in the near term.
How low is debatable. Mortgage rates at this level make homes less attractive and increase demand for fixed income products. If investor demand shifts to more sustainable areas, demand will move back to end users with much smaller budgets and less leverage to bid against each other.