What will be the impacts of a fall in the price of real estate?

What will be the impacts of a drop in real estate prices

UPDATE DAY

Have you noticed? In the news, when it comes to the economy from a broad angle, it means that things are going badly. And if it goes well, we will not fail to point out that it is a bad omen. It can only go wrong. 

In short, no way to have peace of mind. 

Take real estate. Last year, there was a lot of talk about overbidding, ridiculous house prices, inaccessibility.

What have I seen lately? “A Historic Correction Awaits Canadian Real Estate.” Admit that it's scary.

RBC Bank anticipates a 20% correction in the country over the next year. 

BMO Capital Markets has warned that it could be worse.

These scenarios are more alarming than the one presented by Desjardins in the spring. The financial cooperative predicted a 12% decrease in real estate prices in Quebec by the end of 2023.

The RBC and BMO analyzes include Toronto and Vancouver, where the falls could be quite severe.

What does this mean for property owners and those who aspire to become one? 

Not really a reduction< /strong>

Let's put things into perspective.

According to the barometer of the Association professionnelle des courtiers immobiliers du Québec (APCIQ), the median price of single-family homes was $265,400 in the second quarter of 2019 in Quebec. Three years later, it reached $448,600. This represents an increase of 69%. 

Now imagine that the value of real estate drops by 20% within a year. The median price of single-family homes would then drop to $359,000, a fall of nearly $90,000.

Even after this so-called “historic” correction, real estate will still be 35% more expensive than what it was in the second quarter of 2019. 

For the vast majority of owners, it won't change anything. They will be just a little less wealthy on paper than they were briefly.

Who is at risk?

“Yes, but the one who bought at the top, will he not find himself in trouble? you will ask.

We think of all those who acquired a first property last spring. In the second quarter of 2022 (April to June), the median price of single-family homes was 20% higher than during the same period of the previous year. In condominiums, we saw a jump of 14%. 

As long as these new owners are able to repay their mortgage, the situation is not a problem, life goes on. Psychologically, this is not pleasant. The prospect of seeing the equivalent of your down payment (accumulated over the years) evaporate in a few months certainly gets on your nerves, especially since the mortgage does not decrease. 

It is not the cooling of the market that poses the most serious risk for them, but the accelerated rise in interest rates, which directly affects the portfolio.

And what about of those who, at the time of purchase, paid the minimum down payment of 5%? Well, they could find themselves in this very uncomfortable position where the value of their property will be less than their mortgage.

Again, as long as they honor their commitments to their lender, nothing will happen. They do not have to fear any pressure from the bank. 

The situation is no less risky. In a scenario where you have to quickly dispose of your property (following a separation, for example), financial losses are to be expected. In the worst case, homeowners may have to surrender their home to the creditor. If the result of the resale does not cover the entire loan, it will be up to the mortgage insurance to wipe the bill.

Patience, first time buyers 

For aspiring buyers, the situation is not about to improve. On the contrary, the rise in interest rates has considerably reduced access to the real estate market.

Prices must come down to compensate for the higher costs of financing. According to Hélène Bégin, economist at Desjardins, this window will not present itself before the end of 2023, in the best case. 

Once at the bottom, we can hope for a market little more affordable, at least for the trouble. Who knows, it may coincide with a reduction in interest rates.  

Before seeing a favorable alignment of the planets, aspiring buyers may have to wait another two years.

What will be the impacts of a drop in real estate prices< /p>