It’s been a year since the federal government launched its national housing strategy, promising to invest $40 billion over ten years to help address Canada’s housing affordability crisis. But no one can predict precisely how much it will cost people buying and selling homes in the meantime. Or when those costs will start to show up on their monthly mortgage statements. So here’s what you need to know about today’s market and what might happen as we move forward. Are real estate prices going to drop?
1. More people are worried they can’t afford their mortgages.
- More people are worried they can’t afford their mortgages.
According to Bloomberg, the first sign of trouble was when mortgage default rates rose to their highest levels since the Great Recession. In February 2019 alone, more than 200,000 Americans missed payments on $1 billion in home loans. We’re nearing a tipping point where this becomes a widespread phenomenon. Defaults will become commonplace—not just in at-risk areas like California or New York City (which have been hit hard).
Experts say that rising interest rates are one primary reason homeowners have difficulty keeping up with their monthly payments. As home prices increase faster than wages, it becomes harder for potential buyers to afford homes without taking out large loans. Or even go into debt because they don’t have enough savings or income from other sources (like stocks or bonds) available during times when interest rates go up higher than expected by consumers who had planned earlier purchases before things changed (e.g., after receiving higher pay raises at work).
2. The market is constrained by a lack of inventory and new construction
- The number of homes for sale is down.
- New construction is down.
- The number of new homes being sold is also down, even though demand for them remains high.
- It creates a situation that makes it tough to find a home, which keeps prices high. And makes buyers feel like they have no choice but to pay top dollar for anything they can get their hands on.
3. New mortgage regulations and other steps to curb debt in Canada could affect the Canadian real estate market
The Canadian government has implemented a mortgage rule requiring borrowers to meet a mortgage stress test. The new rules mean that those who want to buy or refinance homes need a minimum qualifying rate of 4 percent, which is higher than the typical 2-3 percent interest rates on fixed-rate mortgages.
It could affect both buyers and sellers in the market by:
- Increasing purchase prices as they must pay more for their homes
- Decreasing home sales if buyers can’t pay as much initially
It could also impact properties going up for sale soon, as potential buyers may need help getting approved for financing.
4. There’s a lot of optimism that the U.S. economy may be recovering, which could dampen Canadian real estate prices
The U.S. economy is showing signs of recovery, which could impact Canadian real estate prices. The housing market in the United States has been making steady gains since mid-2013, after falling from 2006 to 2012 by about 40%.
In Canada, home sales have been declining for three years as interest rates have risen, and buyers are concerned about a potential economic downturn (which would hurt their employment prospects). Many people think that this will continue until the end of 2015 at least, but there is more optimism that things will turn around by then, and over time, prices will rise again but at a slower pace than before due to increased consumer debt loads.
5. Interest rates could rise—and that might not be good for your home value either
Keep an eye out for interest rate hikes. While they’re not guaranteed, it’s widely expected that the Federal Reserve will raise interest rates several times over the next two years. That could make it harder to get a mortgage. And increase your monthly payments even more than they would be otherwise. Are real estate prices going to drop?
If you already have a mortgage and are considering buying another house, this is something to keep in mind. It may be harder to qualify for a new loan or pay higher payments on the one you already have if rates go up. And you’ll want to know your options before taking action on any potential new property purchases.
Housing start numbers fall short of expectations. Takeaway: Your home may be worth less than you think it is
You’ve probably heard about the housing market and how it’s been doing well. However, the latest numbers show that starts are down, which may mean that home prices will go down.
A housing start is a new home built on a lot in your neighborhood. The number of housing starts impacts your home value because they signal whether or not there is enough demand for more houses in your area (or if they might even be undervalued). If fewer homes are being built than expected, people aren’t buying as many places as they used to. And if fewer people want them, your home isn’t worth as much as you think!
To sum up, we’re not saying that a housing crash is imminent. It’s unlikely. But if you are worried about your home value and want to ensure you don’t lose money on your investment, now may be the time to consider selling before prices drop any further.