History Suggests Stressful Times for the Canadian Housing Market

TORONTO, July 30, 2024 /CNW/ - Mark Twain once said, "History doesn't repeat itself, but it often rhymes." While he wasn't specifically talking about interest rate cycles, many believe that rate cycles follow specific patterns that can help us forecast market behavior.

The Bank of Canada benchmark rate (BoC Rate) was cut on July 24, 2024, marking its second cut in the past two months. Given that government bond yields have also dropped, the current best fixed and variable mortgage rates, shown below, are at their lowest in the past 17 months.

Housing Affordability: Canada Mortgage Payment for Average New Purchase vs Average Individual Disposable Income 1975-2024 (CNW Group/Wowa Leads Inc.)

Term	3-yr fixed insured*	3-yr fixed uninsurable**	5-yr fixed insured	5-yr fixed uninsurable	5-yr variable insured	5-yr variable uninsurable
Lowest Rate	4.59 %	4.94 %	4.39 %	4.84 %	5.40 %	5.70 %

The lowest mortgage rates are taken from the WOWA's Canada mortgage rate page on July 30, 2024.
* Insured mortgage: Borrowers have mortgage default insurance (e.g. required with down payments under 20%)
** Uninsurable mortgages: These mortgages can't be insured (e.g. homes above $1 Million)

While some believe these low rates might boost the real estate market, recent history tells a more complex story. We at WOWA Leads analyzed mortgage payments for a new purchase versus income over the last 50 years in Canada to see if there is any correlation between home prices and drops in mortgage rates from their peaks.

The above graph shows that the mortgage payment for a recently purchased average property in Canada consumes nearly all of the average person's disposable income. Currently, the Toronto and Vancouver housing markets are stagnant, while the more affordable markets of Montreal, Calgary and Edmonton are hot. For example, in the Toronto housing market, one of the least affordable in Canada, the sales-to-new-listing ratio is at 35%, indicating a buyer's market. Currently, Toronto's inventory is close to 25k, which is the highest level since 2010.

This level of housing unaffordability has only been reached twice before: around 1981 and 1990. Additionally, unaffordability peaked around 1995 and 2007, but to a lesser extent compared to today. What happened during those times?

Q3 1981 to Q3 1983:

The BoC rate reached its highest historical level of 20.78% in August 1981 and fell by more than 1100 bps to 9.26% in July 1983. Did this significant rate drop help the real estate market? Not really. During Q3 1981 to Q3 1983, the Canada home price index declined by 14%, while inflation rose by 17%. The change in prices was very fast in specific areas. For example, in Vancouver, home prices declined by nearly 40% from early 1981 to mid-1982.

Q2 1990 to Q1 1994: 

During this period, the BoC rate dropped from 13.5% to 3.6%. Did this help the real estate market? Again, it did not. In fact, during this time, home prices in Canada dropped by 8%, while inflation rose by 10%. The speed of price change varied significantly in different areas. For example, the Greater Toronto Area's home prices dropped by 28% from April 1989 to August 1993.

Q1 1995 to Q4 1996:

Unaffordability peaked in 1995, though less severely than in 1981, 1990, or 2024. During this period, the BoC rate fell from 8.2% in March 1995 to 3% in November 1996, but home prices still declined by 4.5% while inflation rose by 3%. Prices dropped faster in some of the least affordable areas. For example, from August 1994 to October 1998, Vancouver home prices dropped by 17%.

2007-2008 Global Financial Crisis:

Unaffordability peaked again in 2007, though less severely than the current level. Between Q2 2008 and Q1 2009, home prices decreased by 9% while the BoC rate declined from 4.25% at the start of 2008 to 0.25% in April 2009; however, home prices rebounded quickly in Canada in 2009.

Why Do Home Prices Drop When Affordability Improves From Peak Unaffordability?

We believe this occurs due to the lag effect of rate hikes and the economic deterioration that typically follows the peak of the rate cycle.

Lag Effect of Rate Hikes: In Canada, since most mortgages are fixed rates, the real impact of rate hikes is felt primarily during renewals, which often occur after rates have peaked. This is when some sellers are pressured to sell their properties.

Economic Deterioration: The BoC rate cut implies that inflation is dropping, typically caused by a slowing economy, higher unemployment rates and possibly lower self-employed earnings. Higher unemployment is one of the strongest factors in decreasing home prices.

What Will Happen to the Canadian Housing Market Over the Next Year?

As of now, the Canadian housing market is performing differently across provinces. While Ontario home prices have declined in the last couple of months, Quebec and Alberta are experiencing steadily growing prices. This means we can't make a singular prediction for the whole of Canada. Based on historical performance, unaffordability typically results in lower prices after the rate peak. Therefore, we can expect Ontario, especially the GTA, to see some price moderation while Alberta and Quebec can remain relatively stable. One thing is certain: we haven't yet seen the full impact of high rates on the housing market.

About WOWA Leads Inc.

Founded in 2018 by Hanif Bayat, PhD in Toronto, Canada, WOWA Leads Inc. is a dynamic content platform dedicated to empowering Canadians in their financial journey. With over 1,000 guides, tools and calculators, WOWA is known as "Canada's Personal Finance Encyclopedia" and now, with one million monthly page views, is proud to be at the forefront of helping Canadians make more informed financial decisions by "Simply Know Your Options."

SOURCE Wowa Leads Inc.

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