Our 2022 predictions
Back in January 2022, our team published an article titled, “Predictions for Canadian Real Estate in 2022!”. In this article, we went into depth into the market trends and made bold predictions based on our A.I. powered research. We predicted that the market would stabilize in the near future and when that happens, certain geographical areas and house types would have price corrections. The key indicators we highlighted for our prediction included the increase in housing demand, the increased interest rates (banks bumped 5-year fixed rates from 1.7% to 2.7%) and the fact that the average income for Canadians remained the same despite the drastic increase in the housing market.
Oxford Economics Forecast
A forecast from Oxford Economics predicts that real estate prices will fall by 24% by mid-2024. Director of Canada Economics at Oxford, Tony Stillo, explained that the first reason behind this potential crash is house prices themselves. He went further into detail and stated that current house prices are 19% above the borrowing capacity of median-income households as of late 2021. By the middle of 2022, prices are expected to be 38% higher than what the average household can afford.
The second reason is higher interest rates. The Bank of Canada hiked their interest rate last month and Oxford predicts that there will be three more hikes this year and then the BoC will pause to assess the economy. After assessing the economy, they are expected to raise the interest rate to 2% by mid-2024. The fixed-rate five-year mortgage rates are expected to climb to 5% by the end of this decade after being raised to 4.25% by the end of this year. Although a 24% drop in prices may sound terrifying, it would still leave average prices 15% above the pre-pandemic average prices.
New government policies also play a role in this expected drop. Promises made by the federal Liberal government have been referenced in the report. More specifically, the proposed house flipping tax, the tax on non-resident owned vacant homes and the proposed temporary ban on foreign buyers.
What does this mean for investors?
If you currently own an investment property, you are at risk of losing a significant amount of money. Let’s take a look at a scenario.
Joe purchased a townhouse from a builder in Oshawa for $270,000 in 2014. By early 2022, the property was valued at $950,000. There has been a gain of over 300% during a time in which rent only increased by 25%. Now, if the prices were to drop by 24%, Joe would lose $228,000. Planning and budgeting for a loss this massive can be difficult, especially if some of the gain has already been spent. You may want to consider selling your property while you have the chance to avoid the loss.
If you are planning to invest, you may find a variety of options depending on your risk tolerance level. However, with the market being volatile, it may be tricky to find a suitable investment property if you want to avoid risk.
Our Mortgage Income Fund is a great opportunity for investors who enjoy high returns and low risk. While the market is unstable and unpredictable, you can invest tax efficiently using registered accounts such as RRSPs and TFSAs.
What does this mean for home buyers and sellers?
If you already own a home, and are not planning to sell, it is still an incredibly valuable asset despite the projections. Interest rates are still low compared to industry averages of roughly 5-6%. As such, continuing to pay down your home will result in owning a valuable asset regardless of the market ups and downs.
If you are a first-time home buyer, your chance to get in on the market may be coming sooner than you expected! If prices drop as predicted, you will be able to purchase a home at a more affordable price compared to the all-time current market highs. It is important to ensure that you are pre-approved for a mortgage to avoid any stress and that you have a well thought out plan for this major milestone.
If you have been planning to upsize your home, this may be your opportunity to purchase your dream home! If you are buying a more valuable home, the home that you are selling may drop less so in the end you will be profiting more from upsizing. For example, let’s say that you are selling a $1,000,000 home for $760,000 and would like to upsize by purchasing a $1,500,000 for $1,140,000. The house that you are selling has dropped by $240,000 while your dream house has dropped by $360,0000.
On the other hand, if you are looking to downsize, you may incur a significant loss. Depending on your situation and a number of factors, you may want to consider cashing out and investing while renting a property until the market stabilizes.
It’s a great time to explore your options. Use our A.I. technology to filter your top 10 properties that are relevant to you at any time. Sign in to our Dashboard today to set up your filters so you can notice any change in the market right away!
What does this mean for your mortgage?
If the value of your home drops, you can expect appraisal values to drop in line. If you are considering a refinance or a bank loan, the bank would provide a lesser amount. For example, if you have a property worth $1,000,000, they would give you up to $800,000 at 80%.
Joe has a mortgage of $550,000 on his house in Oshawa. The home is valued at $1,000,000. The bank would give Joe up to $800,000 (subject to approval) so Joe can pay off his debt, finish the basement renovations and get some landscaping done. However, if it drops by 24% the appraisal amount turns to $760,000 but the bank would give only up to $600,000. Then, John receives $50,000 instead of up to $250,000, so he can pay off his debts but may not be able to do the other things he was planning to get done.
Contact your Planulife Advisor to create a strategy for your best option while the values are high. Once the values drop, your options may be limited.
Why should you create a financial plan?
Many people have not considered their options or formulated a financial plan because prices have been at an all time high. However, you should always have a plan for your finances. If your home is worth $1,000,000, you could lose up to $240,000. There is no better time than now to start planning and updating your finances. That’s why we provide free real estate financial plans on our website.
If Joe does not spare a few minutes to take advantage of this free plan, not only could he lose $240,000, but he also loses the high returns he could have earned if he diversified and invested in different assets such as our Mortgage Income Fund.
What should your next step be?
With the real estate market constantly changing, it is normal to be anxious about your future and your finances. Whether you are a first-time home buyer, upsizer/downsizer, investor or even if you would like to know more, you can reach out to your Planulife Advisor at 1-855-600-9020 to discuss your best strategy.
Graham, Penelope. “New Forecast Calls for 24% Drop in Home Prices by 2024.” Toronto Storeys, 21 March 2022, https://storeys.com/oxford-economics-home-price-forecast-2-4-drop/. Accessed 1 April 2022.
Heaven, Pamela. “Posthaste: Canada’s housing boom has been unprecedented; the fallout will be too, say these economists.” Financial Post, 21 March 2022, https://financialpost.com/executive/executive-summary/posthaste-canadas-housing-boom-has-been-unprecedented-the-fallout-will-be-too-say-these-economists. Accessed 1 April 2022.
Huebl, Steve. “New Forecasts Suggest Home Price Declines Are Likely – Mortgage Rates & Mortgage Broker News in Canada.” Canadian Mortgage Trends, 24 March 2022, https://www.canadianmortgagetrends.com/2022/03/new-forecasts-expect-home-prices-to-fall-by-20-30/. Accessed 1 April 2022.
Punwasi, Stephen, et al. “Canadian Real Estate Prices Expected To Drop 24%, Can Crash 40%: Oxford Economics.” Canadian Real Estate Prices Expected To Drop 24%, Can Crash 40%: Oxford Economics – Better Dwelling, 18 March 2022, https://betterdwelling.com/canadian-real-estate-prices-expected-to-drop-24-can-crash-40-oxford-economics/. Accessed 1 April 2022.