The Bank of Canada says it is too early to talk about significant housing adjustments.
And with sales starting to cool down, one of the things to look at is how investors will behave.
How much prices may fall may depend in part on how these Canadian real estate buyers will react to rising interest rates and other market conditions.
As the central bank states in a recent report, investors could “increase housing price cycles”.
Will investors go out of business when faced with volatile prices?
“The sudden turnaround in real estate investments seen during the violence could increase inflationary pressures,” the BoC said.
The central bank report of June 9 included a comprehensive article on the state of the country’s finances.
In it, the bank has identified six risks, both of which are related to mortgages and real estate prices.
The discussion of real estate agents has been part of these two risks.
“The proportion of Canadians who buy homes as investment buildings grow by 2021,” notes a central bank.
The BoC describes investors as “existing joint venture owners who receive extra money to buy a home”.
“They can play an important role in the housing market if they make their property available to tenants for a long time.”
Investors accounted for more than 22 percent of foreclosure sales in the fourth quarter of 2021.
That increased to 19 percent in 2019.
“By 2021, they are buying faster than ever or repurchasing homes,” the bank said.
With this comes more risks in the housing market.
“Increased investment in the housing market could increase the risk associated with higher housing prices,” notes the BoC.
How?
“At the time of housing growth, greater demand from investors could add to the pressure and boost inflation,” explains the bank.
When the Canadian housing market does not perform well, an increase in investors poses an additional risk.
“When prices are stable or falling or the cost of mortgages increases, housing prices as investment declines. The incentive to trade may be greater for investors at risk of falling into one or more equitable areas, also known as ‘underwater.’ ”
The BoC noted that investors often earn more than non-investors.
However, “they tend to have higher interest rates, when all bonds are calculated, as well as higher debt repayment costs”.
“In the event of a wage crisis — whether a reduction in wages or a wage rent because, for example, some employers may be unemployed — high-income investors may have to sell one or more of their assets to acquire certain liquid assets,” explains a large bank.
It went on to say, “While investors may not be considered financially vulnerable as non-investment families are given the same amount of money they are bonded to in real estate, investors may intensify the effects of the economic downturn by increasing housing and inflationary pressures. ”
The Canadian domestic price index fell month-on-month by 0.6 percent in April 2022, the first decline in the month since April 2020.
This is due to the rapid cooling of the market brought on by rising interest rates which have reduced sales.
However, the price index managed to rise by 23.8 percent annually in April.
The annual increase in prices is despite the fact that the number of jobs in April 2022 fell by 25.7 percent below sales in the same month last year.
The sharp decline in house prices may not cause much loss to long-term homeowners who have built up a significant balance.
However, the rapid decline in the Canadian housing market may affect those who have just bought.
“While the sharp rise in house prices over the past year has resulted in significant gains in many homes, those entering the housing market in the past year or more will be significantly exposed in the event of significant price adjustments,” the BoC said. it said.
Does the Canadian housing market see the beginning of significant price adjustments?
“It is too early to say whether the recent decline in retail activity and prices will be temporary or the beginning of a deep, lasting decline,” the central bank said.
The BoC has increased interest rates three times so far this year.
It indicated that more increases were needed to curb inflation.
The critical banking rate rose from the 0.25 percent low epidemic by March 2022 to 1.5 percent from June 1st.
It is expected to increase to 2.75 in October this year.
In a statement, the bank said it was “paying close attention to the fact that many Canadian families are facing high mortgage rates”.
“These households are at risk of falling income and rising interest rates,” notes the bank.
As for the entire life of the country’s financial system, the BoC has no reason to worry too much.
It said, “Canada’s financial system has been strong throughout the COVID-19 epidemic, and the balance sheets of businesses and homes are generally in good shape.”
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