Douglas Todd: Five forces contorting Canadian home prices this spring

Spring is in the air. And for some, so is the expectation of a housing rebound.

The real estate industry hopes the spring market, when sales traditionally surge, will turn around housing prices, which have fallen 19 per cent nationally since their peak a year ago.

There are tentative signs some buyers are tiptoeing back into the market, which has been hammered for a year by mortgage rates that have risen to six and seven per cent. That was forced by the Bank of Canada and others around the world realizing they had to beat back inflation caused by government over-spending during the pandemic.

Realtors and mortgage lenders are playing with the mixed feelings of yearning, fear and greed that arise each spring. With signs of a tiny uptick in sales and listings in February, they enthuse about pent-up demand and upward pressure on prices. Their customary stand is to make people think the best time to buy is right now. Independent analysts are not so confident.

What is actually happening? Neither owners nor investors are putting many homes on the market, so buyers have little choice. Nationally, MLS prices dropped another 1.1 per cent in February compared to January.

In sought-after Greater Vancouver, however, overall prices rose one per cent. In the Fraser Valley, they were up 0.5 per cent, after plunging by one-quarter year over year. The average price of all residential properties in Metro Vancouver is an unaffordable $1.12 million, whereas, across Canada (outside of Vancouver and Toronto), the typical pricetag is $527,000.

Five forces are shaping and contorting Canada’s housing market:

1. Mortgage rates are distressing

Mortgage rates have been rising as fast as the prime rate set by the Bank of Canada, which finally signalled a pause this month. But the big banks are doing everything to soften the blow so that owners in distress don’t panic and put their houses on the market, or worse, suffer foreclosure.

Vancouver housing analyst Steve Saretsky wonders how long banks can go to such lengths. “Banks are sitting on huge unrealized losses,” he says. “A lot of mortgages suddenly morphed into interest-only mortgages when the Bank of Canada set off a wave of trigger rates — something considered inconceivable just 12 months ago.”

2. Canada among the most risky

Ottawa also pumped more money than most into the economy during the pandemic, causing sharp inflation. In addition, home prices in Canada have been plunging far faster than in the U.S., where they are down only four per cent from the peak.

3. Housing psychology changing

Is momentum returning to the market? Sellers, buyers and builders are anxious. While the industry is eager to see signs the worst is over, analysts such as John Pasalis say it is too soon to say. “I’m reluctant to call this the bottom because we are still early in this rate-hiking cycle. The trends we are seeing today may be short-term, but there are still underlying risks.”

Metro Vancouver and Toronto have the lowest volume of houses for sale in two decades, roughly 40 per cent less. That is not only because banks are protecting owners. Three other factors keep many on the sidelines, says Saretsky. “People don’t sell unless there is also something for them to buy. Up-sizing is a lot more expensive, given the surge in borrowing costs. And market conditions remain highly uncertain. People don’t like uncertainty.”

4. Investors are huge players

Another contributor to Canada’s danger is the large numbers who buy second, third and fourth homes as investments. Often with cash.

How many investors have borrowed too much? Some are already selling off, but others are holding on, even while their tenants’ rents don’t match their multiple hefty mortgages.

5. Migration policy driving demand

The record number of international students in Toronto and Vancouver backstops investors, since newcomers put upward pressure on rents, say the B.C. Business Council’s Jock Finlayson and industry analyst Wendy Waters.

While industry leaders usually argue prices and rents are up because of a lack of new supply, Pasalis says it has more to do with the Liberals boosting migration intakes. The number of new permanent residents each year has soared from about 250,000 to almost 500,000.

Spring equinox arrives next week. Yet, given conflicting pressures, it’s almost impossible to predict for whom the real-estate market might shine bright.