Kunal Sawhney, chief executive of Kalkine Group
The ‘capacity’ of the buyer and the ‘will’ of the seller shape the trade aspects of any asset.
A house has become a hot asset, thanks to the unforeseen rally during the pandemic. The pandemic has dealt a stark blow to macroeconomic indicators. A lesser number of Canadians have jobs today as compared with pre-Covid times. Inflationary pressures have seeped into a subdued economy that contracted 1.1% in the second quarter of 2021.
The housing market rally defied all odds, and the average price peaked at C$716,828 in March 2021, according to the Canadian Real Estate Association (CREA). The following months, however, saw subdued demand, with the average price going south.
Capacity of the buyer
Consider this. Canadians have money despite all setbacks. Statistics Canada’s data confirms that credit card debt dropped by 18% between February 2020 – ironically the month when Covid struck – and January 2021. People have repaid their credit card borrowing at the fastest pace in three decades. This is no mean feat.
But what about other debts, especially mortgages? Data by Equifax suggests that 410,000 home loans were sanctioned in the preceding quarter. This growth is the biggest ever on record. The agency estimates that Canadians owe over C$2.15 trillion in consumer debt. An average home loan of C$355,000 was taken out by borrowers in the second quarter, which again is a record-setting figure.
A notable element here is that delinquency rates are low. Canadians have the appetite to borrow more and even repay on due dates. Mortgage rates are ultra-affordable, thanks to a near-zero policy rate of the Bank of Canada. The bank is likely in no mood to hike the rate in the near term, which means the capacity of buyers in the housing market remains largely intact.
Will of the seller
Numbers reveal facts that can shape the will of home sellers in the near-to-medium term. The average house price dropped to C$662,000 in July 2021, according to CREA. This is a sizeable dip when compared with the March high. C$50,000 is a lot of money. The average price has declined for four months in a row. Sales volume is dipping alongside.
Data suggests the decline in sales volume is visible in about two-thirds of housing markets across Canada. There may be many reasons why house sales activity is subdued.
Sellers were willing to list their property during a period of spiraling prices. It can be assumed that even hesitant sellers jumped onto the bandwagon to make the most out of their investment property. Profit booking is what it is called. It is quite certain that sellers’ will to list and sell their property was high at a time when buyers were outbidding each other, which took profit on housing assets north.
While the price of any asset relies more on demand, the volume of trade relies equally on demand and supply. The latter in the housing market was on the back of pumped-up house prices.
Has the market reached stagnation?
The average price in July 2021 was still very high as compared with last year. But are sellers only looking at that?
More likely than not, there must be a sentiment in the market that takes into account that the average price was over C$700,000 a few months back. Such a sentiment normalses high prices, and sellers become reluctant to accept less.
In July, sales volume was down 15% as compared with July 2020. This is a significant dip, more so when analysts, and even the Bank of Canada and the federal government, are talking about the frenzy in the housing market. Where is the frenzy if 15% less houses changed hands in July?
Yes, prices are high, and they will remain so as the buyer has the capacity. But this ‘high’ is not a lucrative proposition for sellers eyeing exorbitant gains in the so-called ‘hot’ housing market.
It’s not about the housing market alone. When the price of any asset rises too much in too little time, sellers are reluctant to sell at a time when the price falls. The beauty of a housing asset is that it is nothing like a listed company’s stock or a crypto asset. A stock’s price, regardless of how big the company is – consider Air Canada and Bombardier – is always vulnerable to producing negative returns. Housing assets will hardly produce negative returns.
In this light, also consider new buyers that bought their investment property during the pandemic frenzy. Will they be willing to take a hit of tens of thousands of dollars?
It seems likely that Canada’s housing market will hit stagnation. Buyers may have the capacity, but the undue media coverage about a ‘bubble’ in the market has hit their sentiments.
A declining average price is making them believe that price will come down further. On the other hand, sellers would not want anything less than their expectations. The C$650,000 average price may be the new benchmark. If not that, C$600,000 will be it.
Anything less would make the seller reluctant to sell. It is hence likely that while the average price will hover near C$600,000 in the medium-term, sales volume will suffer a severe blow.