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The data showing a drop in home sales is proof that a correction is underway in the Canadian real estate market. The Bank of Canada has already raised its key rate four times in 2022, and economists expect further increases during the year. Chilliwack (57%) and the Fraser Valley (50.5%) saw the largest percentage declines in home sales.
But due to the significant slowdown in sales, prices in some property markets across the country are also falling. In Ontario, the average selling price in the City of London fell $76,110 in June, or 9.98% from May. According to HouseSigma, the median price in Metro Vancouver fell 13.9% over the same period.
Potential buyers are weighing their options carefully due to the rapid increase in mortgage lending. Dane Eitel, an analyst and real estate agent, said rising rates and falling prices cancel each other out and therefore home buyers are in the same financial position.
The downturn will deepen
RBC Economists expect the slowdown in the housing market to worsen over the next few months. It expects resale activity and home prices to reach levels below what the bank had previously forecast. Project RBC home resales are expected to drop nearly 23% this year and 15% in 2023.
Nationally, RBC forecasts a 12% decline in the benchmark price from peak to trough, by the second quarter of 2023. Economists at the bank said the most expensive and rate-sensitive market in interest faces larger declines relative to resilient and affordable markets.
Big bite for borrowers
It would be a big mouthful for borrowers if the central bank’s overnight rate reaches 3.25% by October 2022. According to RBC, such a scenario will delay or even ruin homeownership plans. many buyers. Extremely low borrowing costs are a thing of the past as variable mortgage rates could approach fixed rates.
Higher interest rates will reduce mortgage sizes and maximum purchase prices. Additionally, the stress test qualification rates will hamper exhausted buyers nationwide.
REITs to watch
On the investment front, interest in real estate investment trusts (REITs) in the residential sub-sector is expected to increase. Tight market conditions and the mortgage affordability crisis are causing rental prices to escalate. Killam Apartment (TSX:KMP.UN) is worth watching.
The $2.03 billion REIT owns, operates and develops apartments and manufactured home communities across Canada. Killam chairman and chief executive Philip Fraser said strong first-quarter earnings growth and operating performance in the first quarter of 2022 reflect strong housing demand.
In the three months ended March 31, 2022, net operating income (NOI) and net income increased 12.41% and 118.98%, respectively, compared to Q1 2021. Fraser expects that Killam’s development program delivers the highly anticipated growth of its portfolio in 2022 and 2023.
REITs are the best alternatives to direct ownership. If you invest in Killam today, the stock price is only $17.58. The real estate stock also pays an attractive dividend of 4.01%.
RBC Economics calls the slowdown in housing markets a correction, not a meltdown. Although a longer recession is possible, the bank expects the correction to end in the first half of 2023. RBC added that some markets will stabilize faster than others due to strong demographic fundamentals.