Canadian Real Estate Prices Are Down and the Mortgage Rates Are Up: How Does this Affect Buying Power?

Earlier in the summer, we thoroughly analyzed the changes to the BC Housing Market. In that article, it was clear that the total home sales volume had dropped throughout the province, with total sales of all property types dropping nearly 40%. In addition, properties were sitting for longer, creating an increase in the average available months of supply. At that time, it was noted that although a correction in prices had not yet materialized, all of the leading indicators indicated that the shift would be inevitable. Anecdotal evidence was already being reported on, such as the Ottawa couple who were surprised to sell their home for $150,000 less than their neighbours. 

Those anecdotal stories are now becoming part of a larger trend - a drop in real estate prices across the country. We’re going to dig into some analytics to understand better what has changed in three of Canada’s major cities: Vancouver, Toronto, and Montreal. In addition, we’ll discuss how changing mortgage rates combine with shifting housing prices to create a new environment for buyers, with some specific additional focus on purchasing strata property in this environment. Our research indicates that the sales/active listings ratio is a strong leading indicator of future price drops.

With rumoured future rate hikes, we will continue to provide up-to-date analysis of the situation. If you are curious about how these changes may affect your ability to buy or sell a home, our Client Care Coordinators are ready and able to provide you with guidance and connect you with a local real estate expert to guide you in your transaction needs.

Real Estate Prices in Vancouver, Toronto and Montreal

When reviewing changes to pricing in the housing market, it’s essential to recall the significant increase experienced during the pandemic housing boom. Thus, looking at the prices year over year may still show a slight increase. What’s important then is to consider how prices have changed in the past few months - this allows us to understand more directly the effect that the rate changes are generating. Brokerage platform HouseSigma has provided some curious statistics for Vancouver, indicating that the median home price in July 2022 was down 14% in comparison to February 2022. The greatest drop occurred in Delta, which has experienced a nearly 25% drop in just a few months. Generally, the pandemic drove urbanites to purchase cheaper real estate in the suburbs, which became more appealing due to the lack of commute caused by work-from-home opportunities. 

The Toronto Regional Real Estate Board’s data provides additional insight as to what is happening in the largest city in the country. Since last year, Toronto has experienced a nearly 50% drop in total sales, with prices dipping 3.1% from July 2021. Recall that six months ago, prices had increased by 31% year over year. 

In Montreal, the story is much the same. Although prices remain 10% compared to this time last year, sales have dropped by 18% throughout the municipality. In raw dollars, the median price is down $30,000 from the peak, and experts believe Montreal, like other Canadian cities, will continue to drop. Generally, Montreal seems to be hit less hard than other major cities. Even so, they are still seeing an increase in inventory and a decrease in sales - new listings are up 22% from last July. 

Some optimists believe that the normal summer slowdown aggravates these drops - from our investigation, these optimists generally seem to be spokespeople for their local real estate board. Organizations like the Big 5 banks see things differently - BMO Capital Markets released a fairly dire report, indicating that they expect a total price drop of 21% from the peak. We previously reported on RBC’s report forecasting a “historic correction” in line with some of the most significant downturns in modern Canadian real estate. We are forecasting a few more months of price drops, particularly if rumoured rate hikes come to fruition. If this comes true, it will likely wipe out any capital gains for buyers who have purchased within the last year. 

How Mortgage Rate Changes are Affecting Buying Power 

Previously, we discussed how changes to the mortgage rate are affecting the BC Housing Market. Generally, these steeply increased borrowing costs reduce how much house today’s homebuyer can qualify for. Simultaneously, Canadians are facing a higher cost of living due to big jumps in inflation and gas prices. As interest rates go up, the amount of home one can afford goes down. A rule of thumb is that every 1.0% increase roughly leads to a 10% decrease in buying power. This can be illustrated by an example:

Let’s say a Vancouver home buyer wants to purchase a home worth $400,000… OK, maybe this is unrealistic. Let’s head to Williams Lake, a city in the Interior of BC with an average 2022 home price of just over $400,000. So, now that we are situated in this beautiful town let’s buy a home. At a 4% rate on a 30-year fixed mortgage for our $400,000 home, our monthly mortgage payment is $1,900. But, if the rate increases to 5% on the same mortgage, the monthly payment is $2,138! A 1% increase in interest raises the price by 238, which is a 13% increase. If we wanted to keep the same monthly payment, but at 5% interest, we would only qualify for a $355,000 loan. This slight increase in the rate decreases our purchasing power by $45,000, or just over 10%

So, it’s clear that the increase in the mortgage rate is affecting people’s overall buying power. Generally, this means that the market will need to correct downward to accommodate these now sidelined buyers, particularly as properties continue to sit on the market for some time. Essentially, with each increase in the rate, buyers lose hundreds of thousands of dollars worth of buying power.

Trends in Strata Property Fees and The Effect on Affordability 

We wanted to highlight how these economic trends are affecting condo purchases in particular by understanding predicted price shifts and highlighting the additional costs caused by strata fees. For those purchasing strata property, strata fees are another cost to consider alongside the rising prices caused by inflation and the increase in monthly mortgage payments. Generally, discourse around homes and purchase prices tends to focus on the traditional single-family home, inadvertently dismissing the growing number of purchasers buying townhomes, condos, or other types of strata properties. 

So, in a world of ever-increasing costs for homeowners, we wanted to explore how strata fees work and what trends purchasers should be aware of. According to the fantastic resource of Statistics Canada, there are approximately 15,000,000 homes in Canada (as of 2021). Of those homes, just over 2,000,000 are condos. Overwhelmingly, those condos are built in Canada's major cities - Vancouver, Toronto and Montreal. 13% of Canadians will be buying condos, which will continue to grow daily as more cities push for higher density and “missing middle” housing developments.

As noted above, changes to mortgage rates practically affect “how much home” a buyer can afford. Buyers who previously could afford a single-family home may still desire to purchase a property but will have to adjust their budget to accommodate the higher monthly cost of their new mortgage rates. Thus, smaller homes like townhouses and condos will generally experience less of an initial price drop. In Toronto, condo sales are slumping, but prices continue to rise. Another reason prices may not drop like single-family homes is the ability to change supply dynamics. Developers can react to market shifts and dramatically shift supply; in Toronto, 10,000 units will be delayed while developers wait for the current slump to materialize. 

So, condos might not be becoming more affordable anytime soon. And, for buyers who do decide to purchase or for homeowners who continue to hold the property, it’s important to understand the effect of strata fees on affordability. Unfortunately, one thing strata purchasers can’t catch much of a break on is strata fees. The strata corporation of a property sets the monthly strata fee, used to pay for the property's current and potential future typical costs. Stratas must maintain two funds - an operating fund for regular expenses and a contingency reserve fund to properly prepare for and anticipate larger one-off expenses like a roof replacement. Strata fees are somewhat unique, as they are usually set and managed by a board of volunteer members. A strata council may employ the experience of a qualified strata manager to help establish their budget and guide the fees. 

Generally, strata fees don’t go down and can be quite an unexpected bite. Take, for example, the experience of hundreds of different BC strata owners over the past few years. Strata insurance providers point to a stock of wood frame buildings that are less resilient to damage, and the potential for a massive earthquake, as just two of the reasons that they have made dramatic upward adjustments to insurance prices throughout British Columbia. There was an overall increase in BC of 22% to average strata insurance costs, directly affecting the monthly payments of condo owners. A significant variety in strata fees makes it hard to have meaningful discourse on the actual numbers. However, according to FS Residential, those in Vancouver (for example) can expect to pay up to 59 cents per square foot. Let’s imagine you own a 1500-square-foot condo in an older building and are paying 40 cents per square foot, meaning your monthly costs are $600. A 15% increase means you’re now paying an extra $1,080 per year for this property - with no real change to your ownership experience!

So, if you're considering buying a house in BC, it’s essential to take the time to understand the strata costs. By reviewing the minutes that the strata corporation must keep, you can also begin to understand the current insurance situation and if the strata council is predicting any upcoming increases to the monthly fee. 

It’s also good to know that although fees can trend upwards, there has been some regulatory and strategic response to fees increasing as much as 780%. Insurers can no longer pay referral fees to strata property managers (an obvious conflict of interest), and insurers are now required to give more notice to owners about changes. This provides adequate time for a board to speak with other insurers and enter a more competitive rate bidding process. Additionally, the higher fees mean more insurers are entering the market, increasing supply and driving down costs. As with the general market, it will likely take months and, in some cases, years for the situation to stabilize. 

Real estate across the country is beginning to react to top-down mortgage rate shifts. Although it will take some time, particularly for smaller strata properties, the predicted trend is a slump in prices. For those owners who may be priced out of larger homes and are considering purchasing a strata property, it is essential to include your monthly fee in the economics of the deal. If you have questions about the strata fees in your current or potential property or want a more specific analysis of the effect of these changes in your hometown, please connect with our Client Care Coordinators. Not only will they be able to provide expert answers to your questions, but they will also be able to offer you a connection with a local real estate expert who can provide geographic-specific advice on your situation.