Canadian households have lost billions in real estate cool-down

Canada’s real estate market has cooled suddenly and dramatically. Sales are down 24 percent from this time last year. The median home price in this country has fallen $179,047 since the peak in February.

And yet, has much really changed?

“I think of it as letting the air out of a balloon,” said Colin Cieszynski, chief market strategist at SIA Wealth Management. “You don’t want it to blow up and blow up necessarily, but in the short term prices had to come down to something that was a little bit more sustainable.”

For anyone trying to enter the market, the prospect of a cooldown always presented itself as an opportunity. But even with a 20 percent drop in prices, the median home price in Canada has fallen back to where it was at the beginning of 2021.

What has changed, however, is how poor the typical Canadian family feels lately. Statistics Canada says the drop in home prices has helped fuel the largest decline in household wealth this country has ever seen.

Billions Lost in Household Net Worth

It can be easy to watch home prices drop and, if you’re not a homeowner trying to sell, say, “That doesn’t affect me.”

But the reality is that much of the wealth of Canadian households is tied to home prices, the sector itself remains one of the largest contributors to Canadian GDP, and it just took a hit.

Statscan says that the net worth of Canadian households, defined as the value of all assets minus all liabilities, fell by a staggering $990.1 billion in April, May and June.

“This decline was compounded by a $389.8 billion drop in the value of non-financial assets, as the real estate gains streak that began in late 2018 was halted by a housing market grappling with rising rates. of rapidly increasing interest,” the data wrote. agency in a statement last week.

The rest of the drop in household wealth comes as stock markets tanked in the second quarter. (The Statscan figures only covered the period ending in June. Stock markets have recovered somewhat since then, but once red-hot housing market losses have accelerated through July and August.)

A pedestrian walks past a “Help Wanted” sign on the door of a hardware store in Cambridge, Massachusetts, U.S., July 8, 2022. REUTERS/Brian Snyder (Brian Snyder/Reuters)

As home values ​​fall, there’s a ripple effect for the rest of the economy, “like spending on building materials, spending on furniture, all that kind of stuff,” said BMO senior economist Robert Kavcic.

“We have more depressed real estate activity that will drag down real economic growth and drag down job growth.”

As home values ​​have skyrocketed in recent decades, Canadian homeowners have felt wealthier. They borrowed more money and spent more, using their ever-increasing home values ​​as a kind of ATM.

As values ​​fall and interest rates rise, homeowners are less likely to borrow and spend.

Those interest rates will also slow the economy in another way, says Kavcic.

“If your mortgage payment goes up $500 a month, or $1,000 a month, that’s immediately hitting discretionary spending that you might otherwise be spending elsewhere in the economy,” he told CBC News.

Inflation is not over

Meanwhile, inflation is eating away at our purchasing power and eroding wage growth.

Combined, consumers look for ways to reduce spending, and small decisions make big differences when scaled up to a population.

“If you don’t go to lunch, well, that’s one less sale at the local lunch spot and maybe at some point, a couple less jobs,” Kavcic said.

He expects that there are difficult days ahead.

Gas bomb.
Falling gasoline prices are reducing headline inflation. But others the price of other goods and services continues to rise. (Robert Short/CBC)

The latest inflation figures for Canada will be released next week. They are forecast to show a slowdown in the main leading number which in June reached a 39-year high of 8.1 percent.

But economists worry that core inflation, which excludes volatile components like gasoline and food, will continue to rise. Cieszynski says the latest inflation figures from the US show how difficult it is to control rising prices.

“[Last week’s U.S.] The figures showed that inflation is stagnant, remains high and may or may not have peaked,” he said.

“Even if it starts to go down, it can go down much slower than [Wall Street] I had anticipated.”

If inflation persists even as higher interest rates hit the economy, he says, central banks, including the Bank of Canada, may have to raise rates higher than expected and stay high longer than anticipated.

That would mean more turmoil for both stock markets and housing markets. Which in turn would mean an even greater erosion of household wealth than we have already seen.

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