Housing in Canada’s Biggest Cities Crashed: Could Small Markets Follow?

Canadian house prices are crashing now that banks like CIBC (TSX:CM)(NYSE:CM) are raising mortgage rates.

| More on:
a person looks out a window into a cityscape

Image source: Getty Images

House prices are crashing in Canada’s biggest cities. In Toronto, Vancouver, and elsewhere, prices are coming down, following decades of consistent gains. In July, house prices fell 5.3% nation-wide, with the biggest declines being recorded in large urban centres. Since the crash began in March, prices have fallen 22% from the $816,000 peak.

For younger Canadians, this may be taken as good news. Millennials have been complaining about high housing costs for years, now prices are finally within reach. For now, interest rates are taking a bite out of affordability, but if the current trends continue then house prices could fall to a level where total costs (price + interest payments) decline.

However, there’s one catch…

These price declines aren’t happening evenly across the country. The biggest declines are being observed in big cities; smaller markets are seeing lesser declines. In fact, in the Maritimes, prices are barely declining at all.

In this article, I’ll explore the possibility of the “big city housing crash” spilling over to smaller markets.

Housing crashes in Toronto

Toronto is the poster child of the housing market correction this year. Its prices are down to pre-pandemic levels and still falling. While house prices in smaller cities are generally lower than those in Toronto, the latter has a larger percentage decline. Since February, Toronto has seen a staggering $395,000 decline in house prices. Vancouver, as we’ll see shortly, is in the same boat.

Vancouver in the same boat

Vancouver, like Toronto, is seeing a significant housing correction this year. According to The Daily Hive, the average Vancouver home price is down 25% from the February peak. That’s well ahead of the 22% correction seen nationwide. Vancouver was long known as a top destination of foreign homebuyers. The city implemented a foreign home buyer tax to cool the market several years ago, which may have contributed to this year’s correction.

Smaller markets next?

Having looked at the real estate activity in Toronto and Vancouver, we can now turn to the matter of smaller markets. There are two forces pushing Toronto and Vancouver house prices down this year:

  1. Interest rate hikes
  2. Extreme valuations in 2021

Interest rate hikes should affect small markets just like big ones. When the Bank of Canada Raises interest rates, banks like Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) increase mortgage rates.

When this happens, home buyers who borrow from CM pay higher interest costs on homes of the same price. Basically, it makes the total cost of buying a home go up. As a result, the price tends to fall.

Additionally, a bank like CM will be aware of how higher interest rates affect peoples’ ability to borrow. It may require bigger down payments or higher income before issuing a loan. Recently, the government brought in regulations requiring CM and other banks to more closely scrutinize peoples’ finances before giving them mortgages; this could be putting downward pressure on prices, too.

All of the above applies to large cities as well as small ones. The valuation thing … not as much. Canada’s extreme February prices were largely a function of $1 million plus average prices in the biggest cities. In places like St. John’s and Moncton, you can still find houses for $300,000. So, perhaps those markets were never overvalued like Toronto and Vancouver were. If so, prices there may fall less compared to the big cities.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Investing

Money growing in soil , Business success concept.
Investing

2 Great Dividend-Growth Stocks to Stash in a TFSA for Decades

CN Rail (TSX:CNR) and another dividend grower look cheap enough to own in a TFSA value fund for the long…

Read more »

Canada day banner background design of flag
Retirement

Essential RRSP Stocks: 2 Canadian Picks to Secure Your Retirement

Two dividend stocks are ideal anchors for Canadians intending to contribute to their RRSPs in 2024 and save for retirement.

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Retirement

5 Strategies for Maximizing Your CPP Benefits in 2024 and Beyond

Are you looking for the best way to max out your CPP benefits? Here are some tips you may not…

Read more »

Digital background depicting innovative technologies in (AI) artificial systems, neural interfaces and internet machine learning technologies
Tech Stocks

Better Artificial Intelligence Stock: UiPath vs. C3.ai

Deciding between UiPath and C3.ai isn't easy since both have strengths and weaknesses.

Read more »

data analyze research
Investing

The 1 Stock to Own in a Sideways Economy

Here's why Restaurant Brands (TSX:QSR) remains a top TSX stock investors shouldn't ignore for long-term gains in this market.

Read more »

Retirees sip their morning coffee outside.
Retirement

Here’s the Average RRSP Balance at Age 65 and 71 in Canada

Canadian investors can consider holding dividend stocks and supplement their CPP and RRSP payouts in retirement.

Read more »

Technology
Dividend Stocks

10 Years From Now, You’ll Be Glad You Bought These Magnificent TSX Dividend Stocks

The TSX is lucrative to buy these magnificent dividend stocks in bulk and be proud of this decision 10 years…

Read more »

sale discount best price
Energy Stocks

Time to Pounce: 1 Phenomenal TSX Stock That Hasn’t Been This Cheap in a While

Now could be the time to get into Cameco (TSX:CCO) stock, which is up 81% in the last year but…

Read more »