Webcast #43: Canadian Home Prices (7 minutes)

Because of the “wealth effect”, home prices are important to the economy and, consequently, the stock market. For most people, their home is their largest investment. When your neighbour sells their house for a price above and beyond what you anticipated, you feel richer and are more likely to go on an extra vacation, buy a new car, or spend on something elsewhere. That contributes to economic development, higher corporate profits, and a stronger stock market.

The opposite is also true.

The housing market continues to correct. After peaking last February, prices have declined each month ever since. Canadian prices are down about 8% with Ontario and British Columbia — which appreciated the most during the pandemic — contracting the most. In Toronto, prices are off 17% from the February high.

According to a Nanos survey, only 26% of people think real estate prices will increase next year. This is the most pessimistic that Canadian homeowners have felt since 2008. Despite this bearishness, sellers are pulling their listings off the market. Though 5 months of inventory available for sale is the norm, right now there’s only 3 and a half months listed.

Unlike the U.S., where 30-year fixed mortgages rates are the norm, Canada is overwhelmed with 5-year fixed mortgages that are amortized over 25 years. As one-fifth of mortgages get refinanced each year, mortgage holders will adjust to higher debt service costs.

For owners of multiple properties that are heavily influenced by the Canadian housing market, rebalancing to include a more diversified portfolio with stocks and fixed income securities provides less exposure to an asset class that moves in the same direction with higher interest rates.