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Housing market shows signs of life, but it's too soon to celebrate a recovery

Real estate sings in Toronto
Real estate sings in Toronto

The month-over-month decline in housing sales finally reversed in October when sales were 1.8 per cent higher than the previous month, according to data released by the Canadian Real Estate Association (CREA).

Those with a bearish outlook will quickly point out that October 2022 sales were still 36 per cent lower than a year ago, but the month-over-month increase is significant for being the first increase in the sales volume since February.

Of course, it should be noted again that ultra-low mortgage rates brought about higher-than-usual sales in 2020 and 2021. The steep and rapid rise in mortgage borrowing costs has reversed the high-sales trends, perhaps returning the housing sales activity to the pre-pandemic levels.

Essentially, what the low rates giveth, the high rates taketh away.

However, a longer-term view of the data suggests October sales activity was below pre-pandemic levels. Indeed, last month’s sales were 15 per cent lower than the pre-pandemic, 10-year average for October, suggesting that escalating mortgage costs have done more harm than just reversing the pandemic-driven hype in housing sales.

Furthermore, the quality-adjusted MLS Home Price Index (HPI) was down by 1.2 per cent in October from the month before. And the national average housing price was down by 9.9 per cent from the year before. The declines are much more significant than the peak prices observed in February.

Nevertheless, the October sales and listing activity suggest the beginning of a market recovery. Sales were up and new listings in October rose 2.2 per cent from the month before. The increase in sales and new listings may be feeble, but these signs are positive and, in the absence of other unexpected shocks, could lay the foundation for a more robust recovery once buyers and sellers sitting on the sidelines decide to become active again.

A longer-term view of housing prices also provides reason for optimism. For example, October’s seasonally adjusted national MLS Home Price Index benchmark price was $756,200, which is lower than the same time last year and even lower than the peak price observed in February, but up by 38.8 per cent from three years ago.

If the housing bust were to imply a decline in housing prices to such levels that would wipe out the gains over successive years, such a decline in prices has not yet materialized in Canada. In all major housing markets, the HPI benchmark prices were higher in October than three or five years ago.

Given the heterogeneity in 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 attractive during the pandemic, such as Fraser Valley, B.C., or Barrie, Ont., are 55 per cent higher than three years ago. Similarly, prices in Greater Moncton, N.B., were 75 per cent higher.

Those with a bullish view of the markets, such as Shaun Cathcart, CREA’s senior economist, believe “the slowdown in Canadian housing markets is winding up.” Others with a bearish outlook predict even higher declines in sales and prices.

It’s premature to start celebrating a housing market recovery. The rise in mortgage rates poses unexpected new risks for many borrowers, especially first-time homebuyers who opted for variable-rate mortgages with fixed payments. They may be required to pay up to 20 per cent more in monthly mortgage payments because of the increase in mortgage rates.

Bank of Canada estimates suggest that 13 per cent of all mortgages in Canada have hit the so-called trigger rate, where the monthly mortgage payment covers only the interest payment and does not contribute to the owed principal amount. The number of vulnerable borrowers could grow to 17 per cent if mortgage rates rise further.

Canadian homeowners with variable rates and those whose fixed-rate mortgages are soon coming up for renewal may have to dig deeper into their savings to ensure that they can absorb any increase in mortgage payments.

Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.