If you’re confused about what’s in store for Canadian home prices, you’ve got company.
For months, experts had predicted that home prices would decline this fall, triggered by the end of lenders’ mortgage deferral programs and persistently high unemployment.
But here we are in November, and home prices are up big in most key markets:
- +25% in Ottawa
- +21% in Montreal
- +14.8% in Toronto
- +6% in Vancouver
(Year-over-year gains as of October 31, 2020)
Now the question is, how will 2021 fare? Is the downturn in real estate just being deferred, or will prices continue to climb, leading to more FOMO (“fear of missing out”)? Or, if prices do tumble, what kind of hit are we talking about?
The fact is, nobody knows. Forecasts from authorities (even the likes of the Canada Mortgage and Housing Corporation) are so varied and wrong, that you might as well ask your dog. And if you don’t have a dog, a house plant will suffice.
Earlier this year, for example, home prices were forecast to drop anywhere from 5% (RBC), to 10% (Moody’s), to the CMHC’s now infamously pessimistic 9-18% by year-end.
CMHC also predicted that “sales and prices are likely to remain below their pre-COVID19 levels by the end of our forecast horizon in 2022” in the agency’s Spring Housing Outlook. And that prediction isn’t aging so well.
Keeping the fallibility of price forecasts in mind, we’ve looked at three hypothetical scenarios for home values. Below each is the potential impact borrowers would see on down payments and monthly mortgage carrying costs.
The following three scenarios are based on:
- Today’s average home value: $604,211
- As reported by the Canadian Real Estate Association (CREA) for September.
- An assumed down payment: 6%
- i.e., enough to cover the minimum down payment for each scenario below.
- A competitive 5yr fixed interest rate: 1.59%
- The lowest nationally available default-insured rate.
- The current mortgage payment on a new home: $2,294/month
- Based on the average purchase price above.
CMHC's worst-case forecast of an 18% decline in home prices from the pre-COVID peak, which translates into a 23.8% decline from today’s values.
- Scenario: 23.8% price decline
- Future value: $460,409
- Insured mortgage down payment (6%): $27,624
- Change in down payment vs. today: -$8,629
- Monthly mortgage payment: $1,748
- Change from today’s value: -$546 per month
Economists’ average forecast of a 3% decline in home prices (based on Finder.com’s latest survey of 15 economists)
- Scenario: 3% price decline
- Future value: $586,085
- Insured mortgage down payment (6%): $35,165
- Change from today’s value: -$1,088
- Monthly mortgage payment: $2,225
- Change from today’s value: -$69 per month
House prices continue to increase in 2021 at their current year-over-year growth rate.
- Scenario: 17.5% price increase
- Future value: $719,011
- Insured mortgage down payment (6%): $43,140
- Change from today’s value: +$6,887
- Monthly mortgage payment: $2,730
- Change from today’s value: +$436 per month
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Future price expectations clearly have a wide range. That means the minimum down payment by this time next year could be materially different, as could typical monthly mortgage payments.
Most first-time buyers would love to see CMHC’s worst-case scenario. It would lower their minimum mandatory down payment by $9,000 on an average-priced home. What’s more, their monthly mortgage payment would dive more than $500, all things equal.
The risk, of course, is that market timers who are waiting on the sidelines for a price plunge could end up priced out of the market altogether — if prices continue their upward trajectory. This has happened to countless Canadians since the turn of the millennium.
The moral of the story is, take “expert” home price forecasts with a grain of salt. It almost never pays to base your homebuying decisions on predictions that can’t possibly factor in all the relevant, often random, economic factors.
Instead, determine your budget, stick to that budget, and wait until you can comfortably afford the home that checks your most important boxes.
If you can’t buy your dream home right away, look for a more modest property in a high-demand area (e.g., with good walkability or proximity to an area with solid job growth). This gets you building equity right away. That’s key, knowing that you can always upgrade later.
And if you don’t have fall-back resources to ride out a potential 15-20% price drop, don’t buy today.