The residential real estate market in the greater Montreal area is on steroids as a real estate bubble rapidly inflates.
The median price of a single-family home has exploded by 21% in 12 months, reaching $ 430,000 last September, or $ 76,000 more than in September 2019. Meanwhile, the median price of a condominium climbed 10%, from $ 290,000 to $ 318,000 (+ $ 28,000). And that of a plex (2 to 5 units) reached $ 610,000, also up 10%, or $ 53,500.
These sharp price increases in just 12 months seem unjustified to me. It is financially illogical to see the price of residential properties soar when we have been going through the worst financial crisis in history since the start of the year because of the war waged against the COVID-19 pandemic.
Let’s see! More than 40% of economic sectors have been paralyzed for several months. Lots of people ended up on the floor, without job, in the brackets of the Canadian Emergency Benefit. Many businesses have had to close their doors or significantly reduce their business activities.
Many households have been forced to defer their debt payments.
How can we explain the phenomenon of such a real estate bubble?
As potential buyers delayed their purchases due to the lockdown last spring, this had the effect of generating, it seems, pent-up demand, which would have largely contributed to the rise in home prices.
Second hypothesis in support of the current surge in prices: the fall in mortgage rates following the sharp drop in the Bank of Canada’s key rate. It would be said to be a great incentive for households looking to buy property.
Another argument raised: despite the rise in prices, properties in the greater Montreal area are still clearly affordable compared to the metropolitan areas of Vancouver, Victoria, Toronto and Hamilton. This leads potential buyers to believe that they would have a lot of leeway before reaching a peak in the price of our properties.
Several pitfalls stand in the face of real estate demand.
One, we are in the middle of the second wave of COVID-19, which is leading to the closure of several commercial activities. There is even talk of a possible third wave that would occur next winter. Two, the federal government will no longer be able to be as “generous” to the crippled of COVID-19 (crippled workers and businesses) as it was until the end of September. The same goes for the Government of Quebec.
Three, the current economic crisis is likely to last longer than expected.
Four, the slowdown in immigration will automatically put downward pressure on the housing market, especially on the purchase of properties. Five, the level of household debt is very high.
Sixth, CMHC is now more restrictive in its insurance program for mortgages contracted by households who pay less than 20% down payment on the purchase of a property.
If there is one government agency that knows a lot about the real estate market, it is CMHC.
In its assessment of the third quarter housing market, CMHC provides an update on the effect of COVID-19 on said market.
“We remain concerned about the long-term stability of the housing market. With the unprecedented shock caused by COVID-19, we face risks that were not previously considered … “
Last June, CMHC forecast a drop of 9 to 18% in house prices over the next 12 months. That is why it has tightened its underwriting policies for insured mortgages.
Effective July 1, the changes specifically target higher-risk borrowers who offer a down payment of less than 20%, thus requiring such assurance from CMHC. By the way, some 35% of mortgage loans made by Canadian banks are insured either by CMHC or by a private insurer, such as Genworth Canada.
The credit rating required to take out a mortgage has been increased. Borrowing money from other sources (such as a line of credit) to make the down payment is now prohibited. CMHC also tightened debt ratios related to the portion of annual income used to pay mortgage payments, property taxes, condo fees and heating costs.
The gross amortization ratio of property-related debt should not exceed 35% of annual income, compared to 39% previously. The total debt amortization ratio (including interest on credit cards, car payments, and other debts) fell from 44% to 42%.
Through these measures, the CMHC wants to prevent Canada from reviving major imbalances in the residential real estate market as was the case in the late 1980s and in 2008-2009.