Analysis Is a real estate bubble bursting?

The market is very strong and really at the level of supply we need to work withsaid Quebec Finance Minister Eric Girard at Economy zone Thursday night. Housing starts are up 50% compared to the average of the last 10 years. We have programs for social housing, for affordable housing, rent supplements.

Despite this, the Legault government decided to match its tax rules with the federal government’s rules in implementing CELIAPP, the tax-free savings account for the purchase of first property, a tool created by the federal to manage its budget. presented in April.

This program allows first-time consumers to inject $ 8,000 per year into a tax-free account up to a lifetime cap of $ 40,000. Contributions are tax deductible and withdrawals, including capital gain, are not taxable.

When we stimulate a sector of demand, we certainly have an impact on all demand., acknowledged by Minister Girard. But, for him, by targeting first-time buyers, the stimulation of this demand is still limited. We only focused on the first settlements. And it’s a program that’s appropriate now that the market is cooling down a bit.

More and more households are in high debt

This support for demand comes as the Bank of Canada issues a warning about the excessive indebtedness of some households. We know that many people started, during the pandemic, acquiring a larger, more spacious property, which better suited their expectations, but also at prices that also drove them into debt in the long run. . These heavily indebted households may soon be required to pay hundreds of dollars more in mortgage payments.

An increasing number of households have taken out large mortgages to buy a home, adding to the large proportion of households with large debts.wrote the Bank of Canada in its analysis of the financial system presented on Thursday.

” Due to higher interest rates, some households, especially those with the most debt, will find that their financial leeway is greatly reduced when renewing their mortgage. “

And high inflation will damage the purchasing power of the household if wages do not keep pace. Finally, owners – especially the ones most indebted to them – may not be able to tap into their equity in case there is a price correction.we read.

Overall, rising property values, rising stock markets and rising liquid assets have resulted in the overall financial situation of Canadian households improving since last year.

But, according to the Bank of Canada, a growing portion of households have put themselves in difficult financial difficulty to buy property amid high house prices. And the number of households with large indebtedness is reaching a record high.

Thus, the share of households whose debt represents more than 350% of their income 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 need to renew their mortgage term in 2025 or 2026 may see their monthly mortgage payment increase by 30% to 45%. That’s hundreds more dollars to pay every month, thousands more dollars every year.

Along with these additional interest costs, many households have to contend with other types of debt. And both of these households have to live with very fast inflation, especially on fuel and food.

These factors suggest that some households need to reduce spending to pay off their debt as interest rates rise. In this context, households with high indebtedness are particularly vulnerable to income loss, especially if it is combined with declining house prices.warns the Bank of Canada.

Price reduction of 10% to 20% in sight?

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

The average price of a current property in Canada has risen 50% since the end of 2019. It rose from $ 530,000 to $ 790,000 at the peak in 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 18% since February. And this will continue, according to Desjardins, due to rising interest rates, which are affecting demand.

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

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

The balance to be found

Notable in the latest data published is the increasing number of households with high indebtedness, households whose debt represents more than 350% and even 450% of their income. This part is growing and should sound the alarm in Canada.

Part of the extraordinary price increase since the pandemic began may be due to the formation of extrapolative expectations.said 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 possible to see home buyers flocking to the market for fear of losing a bargain or in the hope of realizing significant capital appreciation. […] 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 excessive indebtedness has caused concerns, interest rates have started to rise, a recession is possible and the decline in assets is on? horizon?

And we’re more: we can ask ourselves, once again, how far should we raise rates in a context where it’s more supply and international factors influencing inflation upwards.

Here can be seen the balance for public decision makers between money restrictions and home ownership measures. The ultimate goal is to prevent the slippage that will lead to the bursting of the real estate bubble where so many households in the country are collapsing.