By: Megan Martinez

As Canada’s housing market stands on the brink of transformation, many are anticipating what will come next. In recent years, bidding wars and overspending have been the norm, pushing prices to unprecedented heights. Now, signs suggest a shift is on the horizon. 

Economic shifts and changing buyer behaviors may contribute to adjustments in the housing market.Senior Portfolio Manager & Senior Wealth Advisor Thane Stenner,  CIM®, FCSI® of Stenner Wealth Partners+ at CG Wealth Management Canada explores the challenges ahead and offers a glimpse into the potential future of Canadian real estate.

The Current Landscape of Canada’s Housing Market

The Canadian housing market has been making headlines with its dramatic highs and lows. Key trends are shaping the real estate scene, from record mortgage borrowing to the tug-of-war between housing prices and wage growth. 

In recent months, Canadians have been borrowing at unprecedented levels to finance their dreams of homeownership. Statistics Canada notes that mortgage debt has increased over the past year, reflecting continued borrowing activity in the housing market. This trend highlights the ongoing demand for home loans among Canadians.

Several factors play into the trend of buyers taking on more debt. With interest rates remaining historically low, many see now as an ideal time to buy. The pandemic paused many buying plans, leading to increased activity as conditions stabilized. 

Real estate is increasingly seen as a stable investment amidst economic uncertainties. These borrowing trends reflect a market driven by both opportunity and necessity, pushing many to stretch their budgets in pursuit of homeownership.

Housing prices continue to rise, but wages are not keeping pace, creating significant affordability challenges for potential homebuyers. In Canada, house prices have seen substantial increases, while wage growth remains relatively slow. This growing gap between housing costs and income makes it increasingly difficult for many individuals to enter the housing market.

This paradox leaves many Canadians wondering how to afford a new home. It’s a puzzle that highlights the need for creative financial solutions and government intervention to bridge the gap.

“In this landscape of unpredictability, understanding these key elements clarifies the challenges and opportunities within Canada’s housing market,” says Thane Stenner.

Future Implications of Rising Interest Rates

The now-rising interest rates in Canada are set to reshape the housing market landscape. These changes will affect decisions made at kitchen tables and boardrooms alike. When interest rates climb, so does the cost of borrowing money. For families already managing mortgages, car loans, and credit card balances, this means bigger monthly payments. 

Homeowners with variable-rate mortgages will see their payments increase. Even those with fixed-rate mortgages will eventually feel the pinch when they refinance at higher rates. With larger portions of income being funneled into debt repayment, there’s a greater risk of homeowners being unable to meet their obligations. This could lead to more defaults and foreclosures, impacting overall financial stability.

Investors see rising interest rates as both a potential risk and a possible opportunity, depending on their strategies and market conditions. Some investors might view rising rates as a temporary dip, holding their ground in anticipation of future market rebounds. The market might not crash, but instead, move sideways for a while. This means little gains, but not dramatic losses either. 

Investors are encouraged to sit tight, like sailors waiting for better winds. For some, these rate increases might trigger a sell-off, leading to a market correction. Investors may look to alternative markets or adjust their portfolios for stability.

Notes Stenner, “Navigating these changes will require a keen eye and steady nerves. The rate hikes are more than an economic adjustment; they’re a test of resilience for homeowners and investors alike.”

Government Stimulus and Its Effects

Canada’s housing market has recently been intertwined with the rise and fall of government stimulus measures. As these financial life rafts have been pulled back, it’s essential to consider how this will ripple through the broader economic landscape. As the COVID-19 pandemic swept across the globe, governments sprang into action, providing financial support to keep households afloat. 

In Canada, these measures helped many maintain their financial stability and continue spending. With the withdrawal of these supports, households have faced new challenges. Without government aid, many families have been required to reassess their budgets. 

The fading of stimulus programs has contributed to a surge in household debt. As some families struggle to make ends meet, borrowing could become a more frequent lifeline. The potential rise in debt can have serious long-term implications. 

“A heavier debt burden might lead to more delinquencies and defaults, impacting credit scores and, eventually, the ability to borrow at favorable rates,” says Stenner. 

Preparing for a Market Correction

The thought of a housing market correction can incite fear in the masses. Understanding how to navigate these potential changes is crucial for securing financial well-being. FIRE (Financial Independence, Retire Early) investors often rely heavily on property for their financial goals. And must consider market volatility, interest rate fluctuations, and liquidity concerns in their investment strategy.

The housing market doesn’t move in a straight line. Prices can zigzag, and sudden drops can impact the value of your investments. Rising interest rates can reduce buyer demand and increase mortgage costs, which may put pressure on profit margins for rental properties. Real estate isn’t as liquid as stocks or bonds. Trying to sell quickly in a downturn could mean selling at a loss. FIRE investors need to evaluate how a prolonged market dip could affect their finances. Reflect on whether your portfolio is too concentrated in real estate and explore diversifying it to cushion against market swings.

Being proactive can help homeowners and real estate investors weather a potential downturn. Scrutinize your expenses to ensure you have a safety net if property values dip. Factor in the potential for higher interest rates and adjust your budget to build reserves. 

Investing in various asset types reduces dependency on one sector. If the real estate deck collapses, your other investments can provide stability. Reducing outstanding debts, especially those with variable interest rates, can give you more financial breathing room during volatile times. For those owning rental properties or looking to sell, enhancements like energy-efficient upgrades or cosmetic updates can increase appeal and value, helping maintain returns even in tougher markets.

Keep a pulse on economic signals and real estate trends. Understanding market dynamics can help you make informed decisions instead of reacting out of panic. A solid strategy will be your compass, guiding you to calmer waters while others struggle against the tide. Engaging actively with these strategies will position you to not just survive a correction, but potentially thrive as well.

As Canada braces for shifts in the housing market, it’s crucial to remain informed and proactive. The landscape is changing, driven by factors like interest rates and evolving buyer behavior. Knowing the trends empowers you to make smarter decisions as either a current or prospective homeowner.

Thane Stenner, renowned for his experience in wealth management, has an impressive academic background that includes graduating with honors from Arizona State University and participating in Harvard Business School’s Executive Program. He is cross-border licensed with FINRA in the USA, and with CIRO in Canada, with clients based in San Francisco and the Bay Area as well as across Canada.

His professional journey has spanned several high-ranking positions at Morgan Stanley Wealth Management, including Managing Director and International Client Wealth Advisor, where he spearheaded portfolio management for ultra-high net worth clients. Stenner’s insights have been featured in multiple prestigious outlets like the Globe & Mail, Canadian Family Offices, and BNN Bloomberg.

Disclaimer: This content is for informational purposes only and is not intended as financial advice, nor does it replace professional financial advice, investment advice, or any other type of advice. You should seek the advice of a qualified financial advisor or other professional before making any financial decisions.

Published by: Khy Talara