Analysis |  Is the real estate bubble bursting?

Analysis | Is the real estate bubble bursting?

The market has been very strong and we should really work on the supply levelQuebec Finance Minister Eric Girard said in Economic Zone Thursday evening. Starting housing increased by 50% compared to the average of the last ten years. We have programs for social housing, affordable housing, and rental supplements.

Despite this, Legault’s government decided to align its tax rules with those of the federal government in implementing CELIAPP, the first property purchase tax-free savings account, a tool the federal government created in its budget. Presented last April.

This program allows first-time buyers to pump $8,000 annually into a tax-free account up to a lifetime ceiling of $40,000. Contributions are tax-exempt and withdrawals, including capital gains, are not taxed.

When we stimulate the demand sector, we certainly have an impact on all of the demand.Minister Gerrard admits. But for him, by targeting early buyers, stimulating demand is still limited. We focus only on the first residences. And it’s a decent program now that the market has slowed down a bit.

Eric Girard, Minister of Finance of Quebec

Photo: The Canadian Press / Jacques Boasino

More and more families are burdened with debt

This support for demand comes as the Bank of Canada issues an over-indebtedness warning for many households. We know that, during the pandemic, many people have embarked on the acquisition of larger and more spacious properties, more suitable to their expectations, but also at prices that have also left them in debt for a long time. These indebted families may soon be required to make hundreds of extra dollars in mortgage payments.

An increasing number of families have taken out large mortgages to buy a home, adding to the already large share of debt-burdened families.the Bank of Canada writes in its review of the financial system presented on Thursday.

Due to higher interest rates, some households, especially the more indebted ones, will see a significant reduction in their financial space when renewing their mortgage. »

Quote from Excerpt from the Bank of Canada Financial Regulations Review

High inflation will erode household purchasing power if it does not keep pace with wages. Finally, owners – especially the most indebted among them – may not be able to profit from their shares in the event of a price correction.We read.

Overall, rising real estate values, rising stock markets and growth in liquid assets have improved the overall financial position of families in Canada since last year.

But according to the Bank of Canada, An increasing proportion of families are putting themselves in dire financial straits to purchase real estate amid rising housing prices. The number of families burdened with debt has reached record levels.

Thus, the share of families whose debt represents more than 350% of their income has increased from 6.5% in 1999 to 18.7% in 2021. This share is only increasing year by year.

People who bought properties in 2020 or 2021 and will have to renew their mortgage in 2025 or 2026 could see their monthly mortgage payments increase by 30% to 45%. This means hundreds of extra dollars to be paid per month, and thousands of dollars annually.

Besides these additional interest costs, many families have to deal with other types of debt. These same families are forced to live with accelerating inflation, especially on fuel and food.

These factors suggest that some households will need to reduce spending to service their debt as interest rates rise. In this context, debt-burdened households are particularly vulnerable to income loss, especially if combined with lower housing prices.warns the Bank of Canada.

Teff McClem, Governor of the Bank of Canada

Photo: Reuters/Blair Gable

Is there a potential drop in prices from 10% to 20%?

Moreover, the real estate market is entering a correction phase, according to Desjardins. Economists at the financial institution say the sector has just arrived inflection pointthat correction has begun, but it is not a breakdown.

The average price of a property located in Canada has increased by 50% since the end of 2019. It rose from $530,000 to $790,000 at the peak of February 2022.

After rising prices and sales in late 2021 and early 2022, prices began to fall in March and April, as well as sales, which have fallen by 18% since February. And it will continue, according to Desjardins, due to higher interest rates affecting demand.

Thus, from the peak of February 2022 through the end of 2023, the average property price should fall by 15% across Canada and by 12% in Quebec. The drop should be 18% in Ontario and 20% in New Brunswick.

The sudden rise in prices was greater in Ontario than in Quebec. The debt ratio is lower and the level of savings is higher in Quebec. The situation is less dire than it is in Ontario in terms of affordability, according to Desjardins.

Balance can be found

What is remarkable in the latest published data is the increase in the number of families burdened with debt, families whose debt represents more than 350% and even 450% of their income. This share is increasing and should sound the alarm in Canada.

Part of the extraordinary price increase since the beginning of the epidemic may be due to the formation of extrapolationssays the Bank of Canada. This phenomenon occurs when people expect prices to rise in the future simply because they have risen in the past. It is then possible to see homebuyers flock to the market in fear of losing a deal or in the hope of achieving a major appreciation in capital. […] Inductive expectations, especially among investors, may inflate the pace of price declines in the event of a correction.

Do we still need to stimulate demand, even for first-time buyers, when over-indebtedness raises concerns, interest rates begin to rise, a recession is likely, and property downturns loom?

And let’s go further: We can ask ourselves, once again, to what extent we should increase rates in a context where more supply and the international factors affecting inflation are upwards.

This is where the balance must be found for public decision makers between monetary tightening and home ownership measures. The ultimate goal is to avoid a slide that could burst the property bubble in which so many families in the country are drowning.

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