Mortgage and real estate trends for 2022

Very unusual, not to say more, 2021 is going to an end and traditionally we are looking into new year and analysing mortgage and real estate trends, predications and forecasts.

No matter what part of the mortgage business you look at, the numbers have reached record levels this year: whether it’s record-low mortgage rates, record mortgage volumes, record average mortgage amounts, record-low mortgage arrears, a record number of overleveraged borrowers, record amounts of home equity or the mortgage sector’s record share of GDP.

Net year is also expected to be quite active, although not for the same reasons.

So, here are several mortgage forecasts for 2022.

Rate increases

You don’t have to be an experienced professional to understand what to expect from rate increases in 2022. Just look at Canada’s record high level of core inflation, a central bank’s plans to start raising rates in the “middle quarters” of 2022 and a bond market’s forecasts of 4 or even more rate increases during the next 12 months. Obviously, we’ll face the risks of rate hikes as soon as the headlines become no longer Omicron-related. At that moment, we’ll see scared borrowers hurrying to lock into five-year fixed rates. As a rule, they overpay for those fixed rates, so please think twice and consult a professional before making such an important decision.

Meanwhile, according to Charles St-Arnaud, chief economist at Alberta Central and a former Bank of Canada economist, a strong activity in these markets – which account for about 50% of the national population – may push the BoC to “extremely careful” changes of interest rates in case it’s necessary.

Such a careful approach will be appropriate as the historically low rates support housing affordability, St-Arnaud noted. “The real estate market will probably be the first to suffer from higher rates,” – he added. “When rates rise, that affordability will wane very, very quickly.”

Even a 0.25% increase “will have more influence than we’ve seen over the previous 20 or 30 years”.

Potential mortgage rules changes

Housing sales, real estate prices and mortgage volumes reached record levels this year, as buyers fought over record-low housing availability. This year, we saw the worst housing affordability since the beginning of 1990s, RBC says. In order to get a property, a record share of Canadians overborrowed and investors were the fastest-growing buyer category. This has led to skyrocketing home prices and a “deteriorating quality” of new mortgages. To support bank underwriting and improve the financial system foundation, regulators may tighten credit. Potential changes include raising the minimum down payment for investors from 20% to 25-35%, cutting the maximum ratio of debt to income, limiting borrowed down payments for non-owner-occupied homes and/or making it more difficult to get a mortgage on other properties when you have a large unused HELOC.

Growing supply and slowing mortgage growth

The main reason why Canadians have large mortgages is high home prices. The reasons for high home prices include:

• record-low mortgage rates
• record-low housing supply
• more investor buying (according to Edge Analytics, they account for a quarter of Ontario home sales)
• pandemic changes in buyers’ preferences
• blind bidding
• growing materials costs
• the inability of single-family home construction to keep up with the demand, etc.

Most or even all these factors may change next year, helping housing inventories move closer to their long-term average numbers. That could slow or even reverse price gains by the second half of 2022, especially in case regulators restrict the mortgage market further. It’s even in spite of record immigration and such demand-inducing policies as the federal government’s proposed First-Time Home Buyer Incentive loans.

Price increases to slow

Although it’s not as strong as during the previous years, a new forecast says Canada’s average home price may go up by 10% in 2022. According to Royal LePage, every major market will show home prices gains next year, but they will of course vary.

As usual, Vancouver and Toronto are leading the way, with Vancouver remaining the most expensive market and Toronto showing higher prices gains in 2022. In case of the GTA, the detached home price is expected to go up by 10% to $1,564,200, condo prices may rise by 12% to $763,800. The average increase is 11%.

Metro Vancouver is expected to show the following gains: condos may rise by 8% to $766,800, while detached homes could see prices growing by 12%. It means, the average detached house in Vancouver will be priced around $1,892,800, moving closer to the unbelievable level of $2M.

Is there another city to show such a prices increase? Yes, there is. It’s Halifax with prices for houses and condos expected to rise by 10.5% and 8%, respectively. In addition to it, the city may also have one of the narrowest gaps in price between houses and condos for 2022, with homes predicted at $594,500 and condos at $418,000.

At the same time, the Prairies markets will also be on the rise, although not as aggressively as the previous ones. Calgary and Edmonton will show relatively modest hikes by 6% and 5%, respectively. With some of the lowest condo prices in Canada ($229,500 and $184,800), they have a lot to catch up.

Following two years of strong price growth, Canadian home prices will keep going up next year, although at a slower pace. According to the Royal LePage, the aggregate home price in Canada is expected to go up by 10.5% annually and reach $859,700 in the fourth quarter of 2022. The median price of a single-family detached house may grow by 11.0% to $918,000, and the median condo price could rise by 8.0% to $594,000.

Strong demand from buyers who couldn’t make a purchase this year, combined with the growing need for home from new households and newcomers to Canada, will keep pushing prices up amid the lack of supply. Canada’s strong economy, healthy full-time employment tendencies, and a new coronavirus variant, should lead to the strength of the national housing market.

COVID is still a “thing”

“Although the emergence of another COVID-19 variant is disappointing, we can’t ignore its potential influence on the real estate market,” – noted Phil Soper, president and CEO, Royal LePage. “It is hard to imagine that the BoC will start the inevitable campaign to reduce inflation with the help of higher rates when there’s still so much to be learned about Omicron and cases are going up again. Employers may postpone plans to return to the offices, keeping the focus on the importance of the home as a place to both live and work. Usual travel and entertainment will be restrained again, supporting the household savings stockpiling trend.”

Condo market

Although lockdowns and a remote work trend pushed up the demand for larger properties with outdoor space among buyers who would have preferred condos before the pandemic, the condo sector has recovered as affordability worsens in the middle and upper ends of the market.

“Demand for condos has increased sharply during the recent months, especially in Toronto and Montreal,” said Karen Yolevski from Royal LePage Real Estate Services Ltd. “The price growth gap between condos and detached homes is narrowing. This tendency will go on next year, as entry-level buyers pushed out of more expensive segments, and the rebound of the downtown core continues. Young specialists and those who prefer city’s entertainment tend to focus on the downtown lifestyle.”