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Residential Mortgage Quarterly Review - Q2 2022
August 22, 2022 | Posted by: Dallas Martin
Higher Borrowing Costs
The Canadian Real Estate Association has adjusted its projections downward based almost solely on rising interest rates and the federal mortgage stress test.
“A critical element of the story has been the impact that discounted 5-year fixed mortgage interest rate levels have had on the stress test. In April 2022 alone, discounted 5-year fixed rates increased from the low 3% range to the low 4% range. The stress test is higher of 5.25% or the contract rate plus 2%. For fixed-rate borrowers, qualifying for the stress test has moved from 5.25% to the low 6% range – close to a 1% increase. Variable rates will now play catch-up over the balance of 2022,” said CREA in its abbreviated 2nd-quarter report.
Slowing Sales
The Association expects to see about 568,300 homes change hands by the end of the year. That is down from the more than 621,000 forecasts at the end of Q1. Even though it represents a 15% drop from 2021, it would still leave 2022 as the second-best year on record. Looking ahead to 2023, CREA predicts sales will pull back another 3% to about 552,400 units.
Canada Mortgage and Housing Corporation see an even sharper decline in sales, looking forward to the middle of next year.
The chief economist with the federal housing agency, Bob Duggan, has developed projections based on the Bank of Canada’s Policy Rate going as high as 3.5%. Given that the rate is now 2.5% and more increases have been promised, 3.5% seems quite realistic.
In Duggan’s scenario, sales will drop by as much as 34% by mid-2023 compared to the record-setting levels reached earlier this year. He expects sales to return to their long-term trend as mortgage rates stabilize and the economy starts to recover heading into 2024.
Pricing Projections Mixed
Duggan expects rising mortgage rates will trigger a modest decline in home prices of between 3% and 5% from their current, elevated levels.
On the other hand, the Realtors see reduced, but still impressive, price growth, with the national average home price rising nearly 11% to more than $762,000 this year. A further gain of about 3% is forecast for 2023, which would push the national average to more than $786,000. But both of those numbers are lower that the forecasts in CREA’s Q1 report.
Overall Decline
In a recent report, well-known real estate economist Robert Hogue issued an overall downgrade.
“We project home resales to fall nearly 23% this year and 15% next year in Canada, and the national benchmark price to drop more than 12% from peak to trough by the second quarter of 2023,” Hogue wrote.
