The Canadian housing market created massive wealth for sellers in the past year as prices soared, even as most other economic activities faced the pandemic heat. But in the past couple of months, the sales figures have slowed, according to data from CREA. Does this mean Canada’s housing market growth has reached its peak?

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Although the average house price in Canada is up nearly 40 per cent on a year-over-year basis, new macroeconomic data hints at an impending correction in the sector.

The Canadian economy posted a healthy 6.5-per-cent annualized growth rate in the first quarter of 2021, triggering hope for a wider recovery in job creation. But the latest data shows that the country’s real GDP shrank notably in April 2021, dipping for the first time in months. Amid the reimplementation of COVID-induced restrictions, almost every industry contracted in April vis-à-vis March 2021, with real estate and manufacturing leading the loss.

Some economists project that the GDP data for May 2021 is also not likely to be bright.

Employment, too, noted a dip in numbers for two straight months amid the third COVID-19 wave, even as the vaccine rollout gave way to hope for a faster reopening of the economy. In May alone, Canada saw a loss of 68,000 jobs, while the unemployment rate was 8.2 per cent, as per the Labour Force Survey.

However, even amid the spike in job losses, which remained uneven across provinces, Canada’s mortgage debt climbed.

A report by consumer credit reporting agency Equifax notes that the change in the Canadian household debt profile has been led by mortgage debt in the past year. New mortgages climbed by more than 41 per cent on a year-over-year basis for the first quarter of 2021, while Ontario and British Columbia posted the largest surge in debt.

The available data also suggests that mortgages, where the debt-to-income ratio is more than 450 per cent, rose in the latter half of 2020. This makes new mortgage debt vulnerable to defaults in the event of any dent to household incomes.

The Bank of Canada, in an address last month, was quite critical of the “imbalances in the housing market” and the risk it brings to the overall economy of the country.

The central bank has elaborated on the fallouts of rising mortgage debt. It warns that events like a sharp correction in the housing market or a policy rate hike can lead to an unwelcome need to curtail household spending. In such a scenario, “overstretched borrowers” could be forced to cater to their mortgage debt repayments while curbing other expenditure.

The central bank report also contemplates a situation where a huge decline in home prices can lead to interest rate hikes. In the medium- to long-term scenario, this can lead to a negative wealth creation and reduced household consumption.

Canada’s central bank is yet to rein in its quantitative easing measures or hike its benchmark rates, which has been behind the buying frenzy in the housing sector in the past year.

While record-low interest rates saw the pool of borrowers expand even as employment remained at risk and job loss climbed, government stimulus packages, saw peoples’ cash capacity grow. The net worth of Canadian households, in turn, climbed six per cent in the first quarter of 2021, as per Statistics Canada.

With the federal budget bill having received a green light in the Senate, the government aids are here to stay until at least fall. Home sales figures and prices are also unlikely to see a dip in the short term, with the average home price falling by just 1.1 per cent in May on a month-over-month basis.

While these factors continue to be in play, what will happen when this wild ride ends?

The Bank of Canada and Finance Minister Chrystia Freeland have time and again warned about the inequalities in the real estate market, where vulnerable groups are being outbid by relatively richer parties. This had led to stricter stress tests for new mortgage debt in the past.

But since the market did not react much to these updated tests, the central bank could turn to other options.

Canadian households, data suggests, are not only looking at a later-than-expected lifting of pandemic-induced restrictions, but also at their debts rising further as the government aids end or substantially shrink in the coming months.

CREA data reveals Canadians are seeking the landscape and greenery of rural neighbourhoods instead of the buzzing city life. These smaller real estate markets can shape another boom in the sector that can last for some more months. But eventually, as a spike in inflation and other macroeconomic elements force the central bank to hike the interest rates, correction will grip the housing market.

Realtors should look into devising a strategy to confront this impending correction.


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