Good News for Home Buyers? Real Estate Prices Could Finally Dip 2.2%

Real estate experts see lower demand and fewer bidding wars due to rising interest rates, but homebuyers can’t expect immediate price relief anytime soon.

Christopher Liew, CFA

Christopher is a CFA Charterholder and a former financial advisor at RBC.

Published June 1, 2022 11:45 am EDT

Homeownership is still the dream of many, except those elevated prices are deal busters. Fortunately, the signs of a market cooldown are beginning to show. Based on data from the Canadian Real Estate Association (CREA), the country’s home price index fell 0.6% between March and April 2022, the first time in over two years.

Furthermore, home resales experienced a 12.6% drop. CREA was quick to point to the interest rate hikes by the Bank of Canada as the cause of the slowdown. The actual national average home price peaked in February but has declined for two consecutive months.

However, CREA said a market crash is far from happening, as prices are still 7% higher than in April 2021. Some industry experts believe the slower price appreciation isn’t an indication of a significant correction ahead.

Not so good news

The good news to would-be homebuyers is not actually a price drop but lower demand and fewer bidding wars. Canada Mortgage and Housing Corporation (CMHC) and real estate giant Royal Le Page have the same housing market outlook.

CMHC expects price growth, sales levels, and housing starts to moderate this year, but they should remain elevated throughout 2022. Royal Le Page even forecast the benchmark to increase 15% this year. Moreover, low housing inventory levels will keep values high.

Robert Hogue and the economics team at RBC expect prices to weaken modestly over the rest of the year. Because of the strong start to 2022, the big bank forecast an 8.1% price increase. Because of a stronger-than-expected start to the year. However, they project prices to fall by 2.2% in 2023.

Indirect exposure

Investors can pause plans to purchase investment properties and instead have indirect exposure to Canada’s real estate market. Real estate investment trusts (REITs) have become attractive to passive investors, because they generate regular cash flows from long-term leases. Your cash outlay is also lower compared to buying physical properties.

Top-tier REITs like Granite (TSX: GRT.UN) and Summit Industrial (TSX: SMU.UN) trade at a discount but remain reliable income providers and ideal hedges against inflation. The former pays a decent 3.44% dividend ($90.10 per share), while the latter’s yield is 3.02% ($19.23 per share).

Granite owns and manages logistics, warehouse, and industrial properties (137 total) in North America and Europe. In Q1 2022, revenue, net operating income (NOI), and net income increased 13.24%, 11.90%, and 116.30%, respectively, versus Q1 2021. After the first quarter and as of May 11, 2022, the $5.95 billion REIT added three more income-producing assets to its growing portfolio.

Summit Industrial looks forward to a stronger 2022 based due to strong market fundamentals. Its CEO Paul Dykeman said, “Significant market demand and low availability in all our target markets are driving further increases in rental rates, near-full occupancies and expansion opportunities.”

In Q1 2022, the $3.64 billion REIT reported 12.15%, 11.25%, and 82.68% increases in revenue, (NOI), and net income, respectively, compared to Q1 2021. Summit enjoys a near-full occupancy rate of 98.2% from its 159 multi-use industrial properties.