Housing prices headed for first annual drop in two decades in 2023 as rates rise: Desjardins

“It’s getting very late and the party’s almost over.”

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Boom times in residential real estate may soon be coming to an end.

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Average housing prices in Quebec are projected to fall 4.7 per cent in 2023 as rising mortgage rates begin to squeeze first-time buyers out of the market, Mouvement Desjardins said in a new report published Thursday. with the Bank of Canada having already started to raise its benchmark interest rate, real estate prices should stabilize by the middle of this year before declining, said senior economist Hélène Bégin.

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“Even though many people seem to think this effervescence will go on forever, it’s getting very late and the party’s almost over,” Bégin, who wrote the report, said in a telephone interview from Lévis. Desjardins is Quebec’s biggest residential mortgage lender.

Property prices in Quebec have been on a tear for more than two decades, increasing every year since 2001, Desjardins data show. The last annual drop, a decline of 1.6 per cent, occurred in 2000. Average retail prices in the province are set to climb almost 13 per cent this year to $504,000, according to Desjardins forecasts. That’s 56 per cent more than the $324,000 average price recorded in 2019.

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While real estate prices in Quebec are higher than they were a year ago, month-on-month increases appear to be slowing. That’s “perhaps an early sign that the frenzy is dying down,” Bégin said in the report. The same also applies to Ontario, where Desjardins is projecting a price decrease of about 10 per cent in 2023.

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Montreal and its surrounding areas should be among the hardest-hit markets next year, as well as pockets of the Eastern Townships that saw more overbidding, Desjardins said in its report. Most other Quebec regions should avoid price declines.

Price drops in Montreal could even reach 10 per cent in 2023 because the city is a hotbed of overbidding, Bégin said. Markets such as Laval, Montérégie and the Laurentians have also seen multiple-bid situations during the pandemic, with some properties selling for more than $50,000 above the asking price, she said.

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“A decline of 10 per cent for the Island of Montreal is very plausible because of the overbidding situation,” Bégin said. “There’s a big gap between the price and the real value of the asset. People may have a hard time believing this now, but as soon as there are only two or three interested buyers, multiple bids become less frequent and prices start dropping.”

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Homeowners who bought at the top of the market and need to sell quickly “will be the big losers,” Bégin predicted. “They probably won’t get back that $50,000 that they paid on top of the asking price. It’s a return to a certain normality.”

There’s no question borrowing costs are heading higher. Two weeks ago, the Bank of Canada raised its benchmark interest rate by half a point to one per cent and promised further increases to cool inflation, which is now at three-decade highs. Governor Tiff Macklem said Monday the central bank would consider increasing the rate by another 50 basis points at its next meeting in June.

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First-time homebuyers will probably take a significant hit from rate hikes because they generally have more limited budgets, Bégin said. Last year, first-time buyers accounted for about half of residential sales in Canada. A slowdown in their activity will mark “a turning point for the resale market,” according to Bégin.

Desjardins isn’t predicting a better price correction — for now. Still, “everything will hinge on how far and how quickly borrowing costs rise,” Bégin said.

Variable mortgage rates are expected to be near four per cent by the end of 2022 as the Bank of Canada increases rates. Effective rates on five-year or longer-term mortgages may also reach similar levels.

While Quebecers have been saving more during the pandemic, some homebuyers may still struggle to meet mortgage payments as interest rates rise.

“There is a cushion, but that can shrink in a hurry when monthly payments increase,” Bégin said. “If mortgage rates go above four per cent, people who are on a tight budget are really going to feel the difference.”

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