![\"Canadian](\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2023\/03\/zolo-116590-2023quarter1report_Benchmark-Home-Prices-1024x1748.png\")
<\/figure>\n\n\n\nSome more affordable markets in the Prairies and Atlantic Canada have seen less drop in price because these markets are insulated by solid fundamentals such as higher family incomes and better in-migration. These basic principles prevent home values from dropping too low in these areas, resulting in more favourable results for buyers and sellers.<\/p>\n\n\n\n
As of late 2022, interest rate increases had driven mortgage costs up faster than prices had fallen. As a result, Canadian real estate prices and housing affordability recently dropped to levels not seen since 1981 and 1989 \u2013 the last two times Canadian real estate prices peaked and then corrected. With 2022’s peak behind us, we are seeing meaningful and sustained price drops in many Canadian markets:<\/p>\n\n\n\n Home prices and sales continued to plunge in the first quarter of 2023. The markets are still reeling from the rapid rise in interest rates. However, the pace of the plunge has slowed down.<\/strong> The benchmark MLS Home Price Index fell just 1.1% month-over-month<\/a> in February. With tight housing inventory and falling government bond yields, buyers and sellers are bracing for an exciting spring market. <\/p>\n\n\n\n Housing affordability is based on three components:<\/p>\n\n\n\n Buyer income<\/strong><\/p>\n\n\n\n Adjusted for inflation, real growth in buyer income is a minor contributor to affordability. Wages are growing 5.4% per Statistics Canada<\/a>, a little higher than the 5.2% CPI inflation we currently see. This means we\u2019re seeing real wage growth, which should help buyers afford homes. <\/p>\n\n\n\n House prices<\/strong><\/p>\n\n\n\n Based on the market, Canadian house prices have corrected by 15-25%<\/a>. This drop is the most significant contributor to affordability improvements since the peak. <\/p>\n\n\n\n Interest rates <\/strong><\/p>\n\n\n\n The big question mark moving forward is what will happen with interest rates. The Bank of Canada recently decided to pause rates<\/a>. In February, the real estate market in Canada had already predicted this change, and the market was returning to its usual pattern after a year of decreasing sales. However, some important changes in interest rates made the market more complex for buyers and sellers.<\/p>\n\n\n\n First, home prices and sales in Canada declined in the first quarter of 2023. These declines are likely due to the rapid rise in interest rates. For example, from 3.25% in September 2022 to 4.50% in January 2023<\/a>. This makes it more difficult for buyers to afford homes. However, the pace of the decline in home prices and sales has slowed down.<\/p>\n\n\n\n Second, while home prices are declining, Canadian homebuyers face another problem: less inventory. As more sellers decide to \u201cwait and see\u201d and don\u2019t list their homes for sale, the remaining few homes listed will be a hot commodity. Buyers will have to compete for the few homes for sale, which could lead to a competitive spring market.<\/p>\n\n\n\n As a last point, if the government bond yields keep decreasing, mortgage rates could also go down, which would affect the housing market in the spring. Lower mortgage rates would help buyers afford homes more easily.<\/p>\n\n\n\n Government bond yields are the interest rates paid by governments on their bonds or debt securities. They are used as a benchmark for other interest rates, including mortgage rates. When government bond yields fall, it typically signals a decrease in the cost of borrowing money, which can lead to lower mortgage rates.<\/p>\n\n\n\n Our verdict? There are a lot of factors at play right now, and depending on what happens this spring, these factors could drive prices up or cause them to fall further.<\/p>\n\n\n\n In short, the Canadian housing market is in flux. Buyers and sellers are unsure of what to expect in the coming months. Here is how that impacts you:<\/p>\n\n\n\n With most home buyers choosing fixed-rate mortgages, the market depends on the Government of Canada’s (GOC) 5-year bond yield. Banks and other mortgage lenders use the yield on the 5-year government bond as a guide to determine the interest rate they charge on their mortgages. As a result, the best early indicator of market strength is this bond since its yield is the pricing mechanism for the fixed-rate mortgage. If the bond yield goes down, then fixed mortgage rates also go down, which can make it cheaper to buy a home.<\/p>\n\n\n\n We can look at the downtrend in the 5-year bond yield in January to understand this concept in action. As a result, fixed mortgage rates dropped<\/a> in January, and mortgage applications were up 48% in January year-over-year. Broken down even more simply, the bond yield went down in January, so fixed mortgage rates also went down. As a result, more people applied for mortgages in January than the year before.<\/p>\n\n\n\n This could lead to an increase in demand for homes come spring. It could also potentially lead to an increase in home prices if the supply of homes is not enough to meet the demand.<\/p>\n\n\n\n Even though the price of homes has been going down for 8-10 months, many markets saw a typical increase in price from January to February. This is because more people were buying and selling homes, which is called transaction volume. All major markets from Halifax to Vancouver saw a rise in resale volume, ranging between 2.3% and 15.2%<\/a>, month-over-month in February. <\/p>\n\n\n\n Meanwhile, the volume of people buying homes was down 40% year-over-year. This could indicate that the market has stabilized because of a reversal in mortgage rates.<\/p>\n\n\n\n Because rates are fixed, the uptick in applications could also be a function of buyers trying to “lock in” favourable fixed mortgage rates in a volatile environment. This effect is amplified by the reality that fixed rates are priced below variable rates. <\/p>\n\n\n\n The rush of new mortgages in January stopped as bond yields increased throughout February. Mortgage rates tend to follow bond yields, and buyers were worried that rates could remain higher for longer. Now, the tides are turning with the failure of a US financial institution, Silicon Valley Bank<\/a>, the most significant bank failure since Washington Mutual during the Global Financial Crisis<\/a>. <\/p>\n\n\n\n Investors became concerned about the risk in US markets, so they started putting their money into bonds. Bonds are investments that allow governments or companies to get money for their projects. When you buy a bond, you are lending money to them with the expectation that they will pay you back with interest. Bonds are seen as safe investments because they are backed by established entities. The increased demand for bonds increased their prices, which led to a decrease in their yields.<\/p>\n\n\n\n![\"\"](\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2023\/03\/zolo-116590-2023quarter1report_Housing-Affordability-1024x1272.png\")
<\/figure>\n\n\n\nTL;DR<\/strong><\/h3>\n\n\n\n
What is Happening in Canada’s Housing Market <\/strong>Today<\/em><\/strong>?<\/strong><\/h2>\n\n\n\n
Economic Highlights and Key Factors<\/strong> Impacting Canadian Real Estate Prices <\/h3>\n\n\n\n
What is Happening With Interest Rates and Mortgages?<\/strong><\/h2>\n\n\n\n
The Switch to Fixed Rate Mortgages<\/strong><\/h3>\n\n\n\n
![\"Price](\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2023\/03\/zolo-116590-2023quarter1report_Rate-Mortgages-1024x1443.png\")
<\/figure>\n\n\n\nWhat are Bond Yields?<\/h3>\n\n\n\n
What Happens Next?<\/h3>\n\n\n\n
What Should Buyers and Sellers Expect as we Head Into Spring?<\/strong><\/h2>\n\n\n\n
![\"What](\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2023\/03\/zolo-116590-2023quarter1report_Buyers-Sellers-1024x1523.png\")
<\/figure>\n\n\n\n![\"Market](\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2023\/03\/zolo-116590-2023quarter1report_Market-Trends-1024x760.png\")
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