Surge in Home Prices and Extended Mortgage Repayments: A Spring Market Update

As the Canadian spring market accelerates, we're seeing some notable trends in the real estate industry that warrant a closer look. Home prices are on the rise, but the factors contributing to this growth go beyond the seasonal pickup we've come to expect.

Firstly, the benchmark price for a home in Canada has risen to C$723,900 (about $536,000), a 1.6% increase from March on a seasonally adjusted basis. This recovery in home prices has been largely fueled by a surge in transactions, which have risen by a striking 11.3% from the month before. This uptick in buyer activity points to a robust market, but it's not without its challenges.

A crucial element in the current housing scenario is the critically low supply of homes. The supply of new homes is near a 20-year low, creating a tight housing market that's further intensified by population growth. This supply-demand imbalance is likely contributing to the upward pressure on home prices and will undoubtedly remain a significant concern for buyers and sellers alike.

Another influential factor is a recent trend towards extended mortgage repayment terms. Canada's banks, specifically four of the "Big Six", are extending these terms for overleveraged borrowers, a move that appears to be propping up high real estate prices. There's been a sharp increase in the number of mortgages with amortizations longer than 30 years, which can artificially maintain or even inflate home prices​.

However, this trend isn't without its critics. There are growing concerns about the risk of moral hazard. By allowing longer repayment terms, lenders may create a sense of security that might not be fully justified, potentially leading to riskier lending and borrowing behaviours.

Interestingly, it seems that the primary beneficiaries of these extended amortization periods are not the first-time buyers or families hit by rising rates, as one might expect. Instead, recent investors appear to be reaping the most benefits. Low rates have helped investors capture up to 90% of the new housing supply, often outbidding first-time buyers for existing home sales. This dynamic raises questions about the long-term implications for the Canadian housing market and who it really serves.

The spring market is always a period of change and opportunity in the Canadian real estate industry. However, as we navigate the current trends and challenges, it's crucial to understand the underlying factors at play. Stay tuned for more updates and analysis as we continue to keep our finger on the pulse of Canada's real estate market.