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Real estate at the heart of the storm

Gerard Berube

February 18, 2023



The full effect of the Bank of Canada’s 425 basis point 10-month hike in the overnight rate target should be felt this year. With the exception of a labor market showing no premonitory signs of recession, the year 2023 does indeed begin under the threat of a severe storm.

In the results of the most recent round of the Canadian Social Survey. Quality of Living and Cost of Living surveyed by Statistics Canada from October 21 to December 4, 2022, 35% of Canadian households said it had been difficult for them to meet their financial needs in the past 12 months. Small consolation: among the provinces, this rate is the lowest in Quebec.

For example, when asked if they have the resources to cover an unexpected expense of $500, 26% said no. In more detail, the vast majority of respondents said they were very concerned about rising gas and food prices, while 44% expressed the same level of concern about their household’s ability to buy a property, or even pay the rent, says Statistics Canada.

According to the February edition of the Maru financial health index, 51% of Canadian respondents (41% of Quebec respondents) say they are concerned about their personal finances or those of their household on a day-to-day basis. 39% (29% in Quebec) say they will have difficulty meeting their needs. As for their commitments, 16% expect to default on a large loan or mortgage, and 12% believe they are likely to declare bankruptcy. An increase of two points and three percentage points respectively compared to the previous survey, underlines a blog of the Financial Post.

Strong impact felt on real estate

This deterioration in financial health is having a direct impact on the real estate market. JLR, an Equifax company, had identified an inflection point in its 2022 review of the residential real estate market. According to deeds of sale published in the Quebec Land Registry and compiled by the firm, housing market activity in Quebec has declined for six consecutive months, one of the longest periods of declining sales on record. “And it’s not over yet. The magnitude and speed of rising interest rates began to materialize in the third quarter, and buyers’ ability to qualify for mortgage financing declined sharply,” he added.

The situation did indeed deteriorate further in January. At the start of 2023, the decline in sales accelerated in all segments. There is a 30% decline for single-family homes compared to January 2022, 42% for condominiums and 53% for buildings with 2 to 5 units. “Supply and demand conditions are starting to point to a lower median price compared to January 2022: single family (-3%), condominium (0%) and 2-5 unit (-6%)”, adds JLR.

The firm also measured an accelerated growth in bad debts, with a 40% increase in the number of exercise notices issued across the province during this period. And 15% of that of legal mortgages on residential properties.

Recovery: not before 2024

In their 2023 portrait of the residential real estate market, Desjardins Group economists foresee further deterioration followed by more favorable conditions next year. Housing starts, which fell 15.8% in 2022, are expected to decline about 20% this year. The 45,700 new homes expected in 2023 is a low since 2016. “Although immigration has picked up after the pandemic paused, it is not enough to drive construction.Several projects, particularly in the rental sector, have become difficult to make profitable due to high interest rates. »

Sales of existing properties will also decline by 20% in 2023—a drop of the same magnitude as last year—to fall to a level not seen in nearly a decade. “The price decline is already 6.9% from the April-December 2022 peak and is expected to reach 17% by the end of 2023,” they add.

And Desjardins economists predict that real estate activity should gradually firm up, at best somewhere in the last half of this year, but more definitely in 2024. The upcoming decline in mortgage interest rates and the observed price correction from 2022 to 2023 will result in a marked improvement in affordability. The resurgence of property sales will allow prices to slowly recover from 2024 onwards.”

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