Worst of falling home prices is over and recovery not far off

It is difficult to imagine a weaker housing market than the one we are enduring.

But the market is stronger than it looks. And that will become apparent later this year and next.

Pessimism is inevitable, though. After all, the drop in the average Canadian house price since the market peaked last February is one of the largest on record. And also one of the fastest, playing no small role in stoking fears of a wider recession.

The Canadian Real Estate Association’s (CREA) home price index has plunged 13 per cent in the short space of 10 months from February to December of last year.

That compares with a decline of nine per cent during the financial crisis of 2008 and 2009, which kicked off the Great Recession.

The average GTA house price has fallen by 21 per cent from its March 2022 peak of $1,370,000 — a drop of $287,700.

And the market is expected to continue slumping with CREA, for one, predicting a further drop in the average Canadian house price of almost six per cent this year.

Mortgage rates have, of course, roughly doubled since last March, when the Bank of Canada launched one of the most aggressive interest rate hiking cycles in its history.

In its latest forecast, this week, CREA said most first-time homebuyers will likely remain effectively frozen out of the market “until mortgage rates are lower than they are today.”

But appearances can be deceiving even in as transparent a market as residential real estate.

You might want to brace for reports in early April of a further steep decline in house prices in this year’s first fiscal quarter.

But the reports will be misleading, because they will compare an anemic first quarter of 2023 with the same quarter last year when prices were at their peak.

Thereafter, reported house price declines will shrink for the rest of the year.

Here’s what matters for those concerned that the market won’t come back.

Your house is probably worth more than you paid for it. In most cases a lot more.

By CREA’s calculation, the average Canadian house price in December was still about 33 per cent higher than the same period in 2019.

Indeed, it’s likely worth more than you paid even if you bought during the market’s most exuberant phase.

As Royal LePage Real Estate Services Ltd. calculated in its latest market report this week, less than 113,000 resales took place in the “hypercharged” period of last February and March when prices were at their highest.

That’s only 0.68 per cent of all the houses in Canada.

And most of those transactions were financed with mortgages granted before or just after the bank started raising rates in March, from a rock-bottom 0.25 per cent, and several months before the benchmark rate reached its current 4.25 per cent.

A key measure of the housing market’s health is the mortgage delinquency rate.

Recall that the feds imposed strict mortgage eligibility rules on prospective house buyers during the buying mania. Thanks to those rules and higher mortgage rates that dissuaded buyers, the latest delinquency rate, for last year’s third quarter, is a mere 0.06 per cent.

That’s a 10-year low and compares with a delinquency rate of 0.24 per cent in the Great Recession year of 2012.

“Many sidelined buyers are waiting patiently for the bottom to be revealed,” says Royal LePage CEO Phil Soper. “Once interest rates stabilize and consumers adapt to their new normal, many of today’s sidelined buyers will be back — sooner than many analysts are predicting.”

That pent-up demand is found among millennials and older Gen-Zers. Many of them are calculating that soaring rents make even high mortgage payments the better proposition.

There is also the record flow of immigrants, who mostly settle in Canada’s major cities. The feds plan an additional 400,000 immigrants in each of 2023 and 2024 in addition to the 431,000 New Canadians who arrived last year.

Focusing on the GTA market, Karen Yolevski, chief operating officer of Royal LePage, said last week that “With record-breaking immigration levels reached last year and similar figures expected in 2023, additional demand will be placed on a region struggling with a chronic shortage of inventory.”

Housing will remain in short supply for the rest of this decade, meaning prices will rise.

And though one more quarter-point increase is widely expected Jan. 25 in the BoC’s benchmark rate, this is the year that rates stop rising.

This year will also set the stage for house price recovery in 2024. And CREA forecasts that the average Ontario house price will rise 1.1 per cent next year, and the Canadian average price will rise by 3.5 per cent.

The worst in the housing market price decline is over, and the recovery will soon be underway. In the meantime, the sidelines can be a relaxing place to be.

It sure beats the antic bidding wars when buying a house became secondary to winning some kind of high-stress contest.