Canada’s housing market went berserk in June 2020, when the government lifted stay-at-home orders. Demand for bigger spaces went through the roof and sent home prices to levels not seen before. Today, the low-interest-rate environment is history. The Bank of Canada had to curb inflation by implementing rate hikes.
The central bank has raised it policy rates three times already this year, and the next one on July 13, 2022, could be the most significant. Some industry analysts say the campaign is good because the market balance could return. Unfortunately, it might be too late, because the rate hikes brought on a mortgage affordability crisis.
Homebuyers have waited so long to see home prices drop significantly and bidding wars end. Nevertheless, some Canadians still hope for significant price declines soon, so they can purchase their dream homes. However, no one can be sure how far prices can fall.
Price forecasts
TD Economics published a report last week predicting home sales to drop by about 25% on average in 2022 and to stay low into 2023. Because of the rate-induced decline in demand, the bank forecasts a 19% drop in average home prices until 2023 before modest growth resumes. The culprit for the diminished housing activity is higher borrowing costs.
Desjardins projected housing prices in Canada to fall by 15% in December 2023. It estimates an average price of $675,000 compared to $790,000 in February 2022. The analysts at Desjardins said the figure is still nearly 30% higher than the average price of $530,000 in December 2019.
For Oxford Economics, the decline in home prices has begun in 2022 and should extend into 2024. While it’s going to be a slow but sustainable process, its director for Economics, Tony Stillo, said, “We forecast home prices will decline 24% by mid-2024.”
Strong leasing momentum
On the investment side, True North Commercial (TSX: TNT.UN) didn’t escape the recent market correction. At $6.25 per share, the real estate stock is 12% off its closing price on year-end 2021. Nonetheless, the ultra-high 9.46% dividend yield should compensate for the decline.
The $1.1 billion real estate investment trust (REIT) owns and operates 46 commercial properties. It has maintained a high occupancy rate of 96% in Q1 2022. True North’s competitive advantage and attraction is its high concentration on government and credit-rated tenants. Its tenant base includes the federal government of Canada.
Apart from the year-over-year increases in revenue (4%) and net income (53%), contractual rent collection for the quarter was 99.5%. Management was encouraged by the increased leasing momentum and expect a positive impact when more people return to their offices.
Far from ideal
Shaun Cathcart, the chief economist at the Canadian Real Estate Association, said rising interest rates have caused sales activity to return to more normal levels. There was flattening out of prices, too. However, a 24-25% fall in prices is most welcome, but it won’t be enough. For Oxford Economics, a low home price growth complemented by higher wages over time should improve housing affordability.
