This week’s top stories: Canadian real estate sees credit tightening and the market can change quickly

It’s time for your cheat sheet on this week’s most important stories.

Canadian real estate

Bank of Canada announces QT, the reverse of the program that boosted house prices

Canada’s central bank is letting the public know that it plans to further tighten credit in the country. The Bank of Canada (BoC) explained that quantitative tightening (QT) would start soon. QT unwinds quantitative easing (QE), a program that has helped create demand from home buyers, credit conditions will correct. As credit conditions improve, expect demand for home purchases to correct.

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Home price psychology in Canada can change quickly if price growth slows: BMO

The psychology of house prices in Canada can change quickly, the country’s oldest bank has warned. BMO estimates that home price growth has been about 50% higher than normal. This created a lot of incentive to buy, as well as cling to excess property. However, as rates rise and easy credit conditions reverse, the incentive disappears. If the incentive disappears, it can cause a much larger reaction than expected.

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Intentions to build new homes in Canada are well into correctional territory

Canadian builders are withdrawing plans for future projects after hitting a record high. New building permits fell to a seasonally adjusted $10.1 billion in January, down 8.8% from the previous month. Most were residential permits accounting for $6.72 billion of the total, down 11.63% over the same period. Activity is still 50% higher than pre-2020 data, but this is a steep decline in recent months.

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Housing affordability in Canada hits worst level since last bubble: NBF

Housing affordability in Canada has reached its worst level in more than two decades. A typical household needs to spend 48.6% of their income in Q4 2021 to service a mortgage. This is 2.1 points more than the previous quarter and 7.8% more than a year earlier. The share of income needed to service a mortgage has not been this high in years. Typically, rate normalization deteriorates affordability immediately, but improves it soon after.

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The Bank of Canada has doubled its interest rates, here’s what it means for real estate

The Bank of Canada raised rates this week, indicating that rate normalization has begun. The reversal of easy credit conditions may not be apparent, but it will be over the next few months. The easy credit that has helped boost inflation and house prices should disappear by the end of the year. Usually, higher interest rates help curb inflation and house price growth. Although at this level of growth, the question of how much higher rates need to be is an interesting question.

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Canada resents taxes on foreign buyers and vacant homes after US warns of retaliation

The main political parties had promised vacancy taxes and measures against speculation by non-residents. The combination of measures ensures a life sentence for occupying scarce housing. Now that it’s time to create these laws, they’re not just stalling – they’ve rejected them outright. Citing the concerns of trading partners, this could be due to a threat from the United States to retaliate against any tax.

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Canadian disposable income declines for a second straight quarter

Canada’s population grew rapidly, but their incomes did little. The seasonally adjusted annual rate (SAR) of disposable income was $1.425 billion in the fourth quarter of 2021. It was down 1.32% from the previous quarter and was the second consecutive quarterly decline. Disposable income peaked in the second quarter of 2020, and the last quarter was 3.58% below the peak. The country’s national statistics agency attributed the decline to lower government transfers. Even with a larger population, the amount of money households earn has contracted.

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Canada’s Top Financial Experts See Bank of Canada Aggressively Raising Rates

Our survey of some of the nation’s top financial experts shows they are eyeing aggressive rate hikes this year. The panel expects the Bank of Canada (BoC) overnight rate to reach 1.50% this year. They properly called the last two meetings, even though one was against the consensus. If the overnight rate goes that high, expect very different credit terms soon. Although sky-high inflation should be wiped out.

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Most Canadian mortgage borrowers choose higher interest rate risk exposure

Most Canadian mortgage borrowers opt for variable rate mortgages. About 54.5% of the $38.8 billion in mortgages taken out in December were variable rate. Initially less expensive than fixed rate mortgages, these respond with higher interest rates. If rates were to normalize as expected, that may mean paying more than expected.

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Real Estate in Toronto

Toronto home prices rose $80,000 last month as sellers surged 78%

Real estate prices in the GTA are rising even faster, even as inventories have soared. The price of a typical home rose 6.36% ($80,100) in the TRREB in January and 5.28% ($65,600) in the city. It is not in the last year, but just in a single month that house prices have moved so aggressively. Higher price growth is usually the result of tighter inventory, but not this time. Sellers jumped 78% as the spring market kicked off a bit early.

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Toronto new home prices drop $58,000 despite low inventory and higher sales

New home prices in Toronto fell despite the tightening market. Single-family homes fell $58,500 in January and condominium apartments fell $13,200. Both segments have climbed dramatically over the past year, so it’s not exactly a panic. However, prices fell as sales increased and stocks were scarce. These are the exact opposite conditions for falling prices.

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