The successive increases in key rates will have had the effect of a real cold shower on the entire real estate industry in Quebec in 2022.
While home prices continued to rise, the volume of recorded sales began to decline rapidly in the second half of the year. As a result, the Professional Association of Real Estate Brokers of Quebec (APCIQ) reports a historic decline of 20% compared to last year.
“The exceptional scale of the rise in interest rates defied all predictions,” explains Charles Brant, Director of the APCIQ’s Market Analysis Department. [...] [This increase] has shaken the resale market”, hitherto strongly fueled by the underwriting of variable rate mortgages.
The attack by Russian forces in Ukraine and runaway inflation led the Bank of Canada to sharply increase its key rate. In less than ten months – from March to December – the key rate was increased no less than seven times; it rose from 0.25% to 4.25%, a total increase of four basis points.
There followed an almost immediate reaction on the markets, leading to an easing of overheating, a sharp reduction in overbid offers, and the beginning of a price correction in most regions of the province.
At the end of December, the median single-family home price was expected to climb an average of just 13% from the 2021 median, a marked drop from the growth of the previous year ( 24% ).
This increase in mortgage rates is also having a strong impact on the new home market.
The nine in slow motion
Faced with more cautious buyers, or struggling with ever-reduced purchasing power, the new home sales offices have been increasingly deserted for six months.
To this new reality are added the costs of materials, labor and construction as a whole... until they exceed the willingness (or capacity) of financial institutions to lend to new home builders. or rentals.
"If you need $20 million to start a project, and the bank is now only ready to lend you $16 million", that changes the situation completely, explains Paul Cardinal, the director of the Economic Department of the Association of Construction and Housing Professionals of Quebec (APCHQ).
Under these conditions, he continues, it should come as no surprise that more and more projects are delayed or abandoned, “especially rental projects, which will not help in any way to combat the housing crisis”.
Already, in the census metropolitan area (CMA) of Montreal, there was a 67% drop in housing starts in November. Ditto in the CMAs of Trois-Rivières and Saguenay, with respective declines of 59% and 68%.
Things could return to normal as the central bank resumes lowering its policy rate. This could still take some time, however, and lead to several more increases.
Economists from both CMHC and APCHQ are currently counting on a start of rate easing “from the end of 2023”. To be continued.
SIGNIFICANT DROP IN HOUSING STARTS
The number of residential housing starts in Quebec is on track to reach 58,000 units in 2022, a decline of 14% compared to 2021. With no less than 67,962 housing starts, 2021 had been the best year for construction in 33 years.
Next year, the slowdown will be even more pronounced, as the Association of Construction and Housing Professionals of Quebec (APCHQ) anticipates an additional decline of 21% in housing starts (46,000 units).
According to its forecasts, it is the rental housing segment that will suffer the largest drop in housing starts (-32%) in 2023. A situation that could well amplify the still unresolved crisis of the accommodation.
According to the Canada Mortgage and Housing Corporation (CMHC), Quebec will be short of 620,000 homes of all kinds by 2030, if the rate of annual housing starts does not double quickly.
NO QUESTION OF ABOLISHING THE “CRISIS SIMULATION”
The Office of the Superintendent of Financial Institutions (OSFI) confirmed at the end of the year that the minimum qualifying rate (MAT) for uninsured mortgages, also known as the "mortgage interest rate stress test", will remain unchanged until further notice.
Uninsured mortgages are residential loans granted with a minimum down payment of 20%. Under this standard, lenders must assess the repayment capacity of these borrowers according to the higher of the interest rate between the contractual rate plus 2.0% and a rate of 5.25%.
For the past six months, many have been asking for this safety standard to be lowered or abolished. Two weeks ago, Ottawa suggested that far from abolishing it, the "stress simulation" put in place could on the contrary see its application extended. OSFI plans to begin its review of “mortgage underwriting practices and procedures” next January.
RENOVATIONS CONTINUE...FOR NOW
After jumping 31% and setting a new record in 2021, home improvement spending has hardly slowed in 2022.
According to the Association of Construction and Housing Professionals of Quebec (APCHQ), they will probably cross the $23 billion mark this year, an increase of 19% compared to last year.
However, the renovation market is very likely not to escape the negative effect of the increase in key rates by the Bank of Canada, fears economist Paul Cardinal, of the APCHQ. It predicts a 15% decline in residential renovation spending in 2023, to $20 billion.
THE MIGRATION THRESHOLD CONCERNS THE INDUSTRY
The Legault government's discussions surrounding the possibility of limiting immigration to Quebec are worrying more and more professionals in the real estate sector. For the industry, immigration is an important factor in the growth of demand, mainly in the Montreal region.
Already, Quebec is not getting its fair share of this migratory flow. According to economist Daren King of the National Bank, Canada welcomed a total of 493,000 immigrants between September 2021 and August 2022. However, while the greater Montreal region alone accounts for 11.7% of the population of country, he finds that it only succeeded in attracting 10.7% of these newcomers.
Unlike Montreal, he pointed out to the APCIQ, Vancouver, Calgary and Toronto all manage to attract a higher proportion of immigrants than their demographic importance in the country. For example, with a population representing 17.8% of Canada, Toronto managed in 2021-22 to attract 31.4% of new immigrants, a gold mine for Ontario.
If, thanks to the adoption of a new immigration policy by Quebec City, this imbalance were to continue for a few more years, he warned, its effects would be felt negatively both on the health of the real estate industry and on the economy of the province as a whole.