REAL ESTATE

REAL ESTATE CIBC says correction won’t solve affordability woes

by Carlito Pablo

Some are said to be secretly wishing that the Canadian housing market would crash and burn. Supposedly, that’s how affordability can be achieved.

Now there’s an ongoing correction in the real-estate market because of increasing interest rates. Sales have dropped, and so have prices.

The Bank of Canada is expected to raise interest rates again, and the housing market is surely going to feel additional pain.

However, according to a new analysis, one thing that’s not happening is a collapse. As CIBC economist Benjamin Tal wrote in a July 22 post: “While at times it can feel that way, the housing market is not in a free fall.”

The economist also believes that changes currently happening will not produce what many may consider to be affordable housing. “The point is that the ongoing correction will not solve the housing affordability crisis,” Tal stated.

Tai estimated that “close to three-quarters of the 14% decline in the average national home price since the February peak was due to the composition factor”.

This refers to “sales activity shifting from more expensive units (low-rise) to less expensive units (high-rise)”.

The “reset process is not over” in the Canadian housing market. Sales activity will continue to fall, as well as average prices.

“That price will have to fall by additional

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This Vancouver home at 250 West 18th Avenue had an asking price of $4,298,000 on July 5 and sold three days later for $4.6 million—another sign that homes remain out of reach for many. 25% to reach pre-Covid levels,” Tal wrote. “And back then,” the economist continued, “nobody suggested that Toronto or Vancouver were affordable.”

What’s happening in B.C. could provide some context.

The B.C. Real Estate Association has reported that a total of 7,136 homes were sold in June 2022, a decrease of 35.7 percent from June 2021.

However, the average price in the province rose to $951,105, a 4.6 percent increase from the $909,657 recorded in June 2021.

Meanwhile, the Real Estate Board of Greater Vancouver reported that sales in the region totalled 2,444 in June 2022. That number represents a 35 percent decrease from the 3,762 sales in June 2021, and a 16.2 percent reduction from the 2,918 homes sold in May 2022.

Meanwhile, the composite benchmark price in the region covered by the Greater Vancouver real-estate board stood at $1,235,900 in June 2022.

This benchmark price marks a 12.4 percent increase over June 2021, a two percent decrease compared to May 2022, and a 2.2 percent decline over the past three months.

In his post, Tal also noted that housing could even become more expensive.

“The significant and rapid increase in interest rates, along with surging construction costs and a lack of available labour make projects that only yesterday looked promising totally uneconomical,” Tal wrote.

Instead of greater affordability, the opposite could be happening. “In fact, we might be in the process of making the situation worse,” Tal wrote.

At the same time, it appears as though brand-new homes in Canada have become more expensive.

Nationally, prices increased 7.9 percent in June 2022 compared to the same month last year. On a monthly basis, prices rose 0.2 percent last month from May 2022. A report released last week by Statistics Canada showed increases in three major urban centres in B.C. Prices of new homes posted an annual increase of 6.8 percent in Greater Vancouver in June 2022. Victoria recorded a 10.9 percent rise; Kelowna, five percent. Across the nation, Calgary led the pack with an increase of 15 percent, whereas Toronto had a 5.1 percent annual increase. The report, released on July 21, drew from Statistics Canada’s New Housing Price Index, which measures changes in the selling prices of new residences. The NHPI covers single-family homes, semidetached houses, and townhouses, also known as row or garden homes. A previous Statistics Canada report released on October 5, 2020, talked about the strength of the new-housing market during the COVID-19 pandemic. “Housing prices generally fall during a crisis, as people often refrain from big-ticket purchases during times of uncertainty,” Rohit Verma and Rehma Husain wrote. It was a different story with the onset of COVID-19 in 2020, though. Verma and Husain reported that prices for new houses were up 1.3 percent six months into the pandemic, between February and August 2020. This was in contrast to the 0.2 percent drop observed during the same period in 2019. g

That price will have to fall by an additional 25% to reach pre-Covid levels.

– CIBC economist Benjamin Tal