Understanding Proper Truth of Affordability Through Market Correction

Oct 19, 2022


Affordability Through Market Correction

In the past few years, it is a common topic of discussion that housing prices have skyrocketed since the pandemic began.

Since 1980, BMO estimates that home prices have increased 3% per year in real terms, which roughly reflects real (inflation-adjusted) wage growth and interest rates. As noted above, it is well known that that was not the case in the past few years. Well, according to BMO in a release to investors, home prices have climbed 38% above trend, meaning that prices have jumped over a third in the past two years, which is a big splash above the normal baseline.

These deviations, known as overvaluation, do not normally stay around that long, although it is important to note that we have not seen an overvaluation in Canada this big in at least 40 years.

Why is this important?

Well it leads to our topic today about affordability. There is a lot of stress and worry in recent months, some recession based, some media based, and others stressed about how the value of a homeowners home or a purchase into the market for first time home buyers is going to look.

When looking at a potential dipping market in the future, you can look at it two different ways. For a homeowner, you may be scared that you are going to lose value in the price of your home and ultimately fear that every day you do not sell is the more value you will lose. For first time home buyers, you may be happy because the value of real estate is dipping again and it may be a chance to get into the market.

Let’s break down both realities.

For homeowners, let’s look at the angles to help you feel less stressed about the correction in this housing market.

First key to point out is the word correction. The housing market is correcting, not crashing. With the Bank of Canada hiking up key interest rates, it starts to signal a change in the economy, not necessarily at a fast rate, but over time. The impact of these rate hikes by the Bank of Canada is now being noticed, but remember it is a correction, not a crash.

A crash would signal that home prices would plummet down far, potentially to as low as pre-pandemic, or even lower. That is not the case, as it is believed that housing prices will drop no more than 15% of 2022s early year prices by the middle of 2023. Remember, early in the blog we stated that BMO released that prices increased 38% in two years. This means that even with a 15% drop, the real estate market will still be higher than the beginning of 2020. This means that the value of your home should not drop as much as you may think.

A second key point to consider is timing. Do not try to time the market, do what you need to do to best serve you. When you feel that you are in a business to sell and/buy then you make that decision and do not let the market influence you. Rates and values fluctuate all the time and perfecting an entry into the market is not necessary. Remember that if you buy and sell within a similar region, the sale of your property is likely to have lost a similar valuation percentage as the property you just bought. 

Hopefully those two key points above make you feel better and at ease. Remember, don’t let the media persuade your decision. Analyze the market, contact a professional, and make a decision when it is best for you.

For first time home buyers, hopefully the information above helps you understand what this means for you. A dip in the real estate market is a big plus because the prices will not be as high as they are today, with the potential of the real estate market going up again in the future. That being said, rates have changed a lot over the past many months, so please reach out to us to help you find the best possible deal at the best rate. Do not let the high rates scare you, as we said above, rates fluctuate all the time and finding the perfect time to enter the market is not necessary. 

Hopefully this blog gave some insight into what to expect in the coming months. Always feel free to reach out to us when you are ready to enter the market, sell your home, change your mortgage, refinance, or more!

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