The fear of recession is not the beginning of wisdom

Canadian home prices saw the biggest price decline for a calendar year since records began, with a 7.5% drop over a one year period.

Home prices crashed as rapidly rising interest rates forced a market adjustment that may have further to go.

The country’s benchmark home price fell 1.6% in December to $730,600, bringing the total decrease since February’s peak to 13.2%, the Canadian Real Estate Association said. It was the biggest peak-to-trough falloff since the group started compiling the data in 2005

With the economy in danger of entering a recession, and the Bank of Canada warning of more rate hikes to counter persistent inflation, the housing market may face continued pressure in the coming months.

A record number of buyers used floating-rate debt for purchases during the pandemic boom, and those borrowers may come under increasing strain if mortgage costs remain high. Job losses from an economic slowdown also would make it harder for people to keep up with loan payments and stay in their homes.

The housing slump has largely been driven by a pullback among buyers who’ve been priced out due to higher interest rates. The number of transactions in December was down 39% on a non-seasonally adjusted basis from last year, when the market was approaching its peak and before interest rates started rising.

Is Canada’s housing party finally over?

Canadian house prices drop to their lowest level as recession fear looms

For the past 25 years, Canada has been in the grip of the world’s biggest housing boom, a near unbroken run of price appreciation unparalleled in the developed world.

Now the party’s almost over, and pain is starting to spread.

By March, it will be a year since the Bank of Canada began raising interest rates — meaning ever more of the record number of people who took out short-term or floating-rate mortgages at historically low rates will find themselves fully exposed to the roughly fourfold jump in borrowing costs since then, a potentially catastrophic shock to their personal finances.

The fate of Canada’s housing market will depend on whether or not they can hold on. And just as the country was a leader in the years-long global real estate frenzy, how its downturn plays out — a relatively orderly correction, or a brutal crash — may be a harbinger for what awaits the rest of the world.

Reference:

Bloomberg

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