Will a real estate bubble burst?

The market has been extremely strong and we really have to work at the supply levelsaid Quebec Finance Minister Eric Girard economic zone Thursday evening. % par rapport à la moyenne des 10dernières années. On a des programmes pour les logements sociaux, pour les logements abordables, des suppléments aux loyers.”,”text”:”Les mises en chantier sont en hausse de 50% par rapport à la moyenne des 10dernières années. On a des programmes pour les logements sociaux, pour les logements abordables, des suppléments aux loyers.”}}”>Housing starts are up 50% compared to the average over the last 10 years. We have social housing programs, affordable housing, rent subsidies.

Despite this, the Legault government decided to harmonize its tax rules with those of the federal government in the implementation of the CELIAPP, the tax-free first home purchase savings account, a tool created by the federal government in its budget presented last April.

This program allows first-time buyers to deposit $8,000 per year into a tax-free account, up to a lifetime limit of $40,000. Deposits are tax deductible and withdrawals, including capital gains, are not taxable.

If we stimulate a demand sector, we certainly have an impact on the entire demand., acknowledges Minister Girard. By specifically addressing first-time buyers, however, this demand stimulation is still limited for him. We only focus on the first apartments. And it’s a program that’s appropriate now that the market is cooling off a bit.

Eric Girard, Quebec Minister of Finance

Photo: The Canadian Press / Jacques Boissinot

More and more heavily indebted households

This support for demand comes as the Bank of Canada warns that several households are becoming over-leveraged. We know that during the pandemic, many people have started acquiring a larger, more spacious property that better meets their expectations, but at prices that they have also owed for a long time. These heavily indebted households could soon find themselves making hundreds of dollars more in mortgage payments.

A growing number of households have taken out large mortgages to buy their own homes, adding to the already large proportion of heavily indebted householdswrites the Bank of Canada in its review of the financial system presented on Thursday.

Due to higher interest rates, some households, especially the most heavily indebted, are being severely restricted in their financial flexibility to extend their mortgages. »

A quote from Excerpt from the Bank of Canada Financial System Review

– surtout les plus endettés d’entre eux– pourraient ne pas être en mesure de puiser dans leur avoir propre foncier dans l’éventualité d’une correction des prix”,”text”:”Et l’inflation élevée érodera le pouvoir d’achat des ménages si les salaires ne suivent pas. Enfin, les propriétaires– surtout les plus endettés d’entre eux– pourraient ne pas être en mesure de puiser dans leur avoir propre foncier dans l’éventualité d’une correction des prix”}}”>And high inflation will erode household purchasing power if wages fail to keep up. Finally, owners – especially the most indebted among them – may not have access to their equity in the event of a price correction.we read.

In general, the rise in property values, the rise in stock markets and the growth in liquid assets have meant that the overall financial situation of Canadian households has improved since last year.

But according to the Bank of Canada, A growing proportion of households have found themselves in dire financial straits to buy real estate in view of the high real estate prices. And the number of highly indebted households is reaching record highs.

For example, the proportion of households whose debt accounts for more than 350% of their income has increased from 6.5% in 1999 to 18.7% in 2021. This proportion increases year after year.

People who bought homes in 2020 or 2021 and need to extend their mortgage term in 2025 or 2026 could increase their monthly mortgage payments by 30% to 45%. That’s hundreds more dollars to pay each month, thousands more dollars annually.

In addition to these additional interest costs, many households have to contend with other types of debt. And those same households are living with runaway inflation, especially on fuel and food.

These factors suggest that some households will have to reduce spending to service their debt as interest rates rise. In this context, highly indebted households are particularly vulnerable to loss of income, especially when this is accompanied by falling house prices.warns the Bank of Canada.

Tiff Macklem, Governor of the Bank of Canada

Photo: Reuters/Blair Gable

Price drop of 10% to 20% in sight?

In addition, according to Desjardins, the real estate market is entering a correction. Economists at the financial institution say the sector has just reached a turning pointthat a correction is beginning, but it’s not a collapse.

The average price of an existing home in Canada has increased by 50% since the end of 2019. It went from $530,000 to $790,000 at its peak in February 2022.

After an increase in prices and sales in late 2021 and early 2022, prices started falling in March and April, as did sales, which are down 18% since February. And it will continue, according to Desjardins, due to the rise in interest rates affecting demand.

As a result, the average house price is likely to fall by 15% across Canada and 12% in Quebec by the end of 2023 from the February 2022 peak. The decline should reach 18% in Ontario and 20% in New Brunswick.

The price increase was greater in Ontario than in Quebec. In Quebec, the debt ratio is lower and savings levels are higher. According to Desjardins, the affordability situation is less critical than Ontario.

The balance to be found

What is striking in the latest published data is the increase in the number of highly indebted households, households whose debt accounts for more than 350% and even 450% of their income. This proportion is growing and is likely to raise alarms in Canada.

Part of the extraordinary price increase since the pandemic began could be due to the formation of extrapolative expectationssays the Bank of Canada. This phenomenon occurs when people expect prices to increase in the future simply because they have increased in the past. It’s then possible for homebuyers to flock to the market, afraid of missing out on a bargain or hoping to make significant capital gains. […] Extrapolative expectations, especially among investors, could amplify and accelerate price declines in the event of a correction.

Do we still need to stimulate demand even for first-time buyers when over-indebtedness is a concern, interest rates are starting to rise, a recession is a possibility and property declines are on the horizon?

Moving on, we can again ask how far we should raise rates in a context where more supply and international factors are driving inflation higher.

It is up to the public decision-makers to find the balance between monetary tightening and home ownership measures. The ultimate goal is to avoid a price slide that would lead to the bursting of the real estate bubble into which far too many households in the country are falling.

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