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When is the Housing Market Going to Crash?


Is the Housing Market About to Crash?

The housing sector has exploded in recent years, particularly in the post-COVID-19 era. Double figures became the norm.

Everyone is asking whether today’s housing market will follow previous trends where giddy sellers scour the information superhighway and frantic buyers were being forced out of the marketplace by soaring demand and bidding wars.

Yet, exorbitant price growth fuelled by a low inventory of housing supply and the upward pressure of market forces has hit everyone in the global economy, from the average worker bee to upwardly-mobile professionals. The front end of 2022’s real estate party has been going very well.

But does that mean that we are poised for a housing correction or worse, a crash sometime soon? As real estate prices continued their upward march, investors and homeowners alike are asking themselves what the housing market will do in the near future.

The State of the Union

The housing market appears to be slowing; According to Canadian Real Estate Association (CREA), residential property sales recorded over Canadian MLS® Systems were down slightly by 1% between July and August 2022. While this was the sixth consecutive month-over-month decline in housing activity, it was the smallest of the six as the national sales slowdown triggered by rising mortgage rates continues to moderate.

Due to rising interest rates, it was close to an even split between the number of markets where sales were up and those where sales were down.

Gains were led by the Greater Toronto Area (GTA) and a large regional mix of other Ontario markets. These were offset by declines in Greater Vancouver, Calgary, Edmonton, Winnipeg, and Halifax-Dartmouth, giving real estate professionals in those historically strong seller’s market condition cause for concern.

The actual (not seasonally adjusted) number of transactions in August 2022 came in 24.7% below the same month last year despite more available housing options and supply being able to meet demand. While today’s market still shows a large decline, housing experts felt it was smaller than the 29.4% year-over-year drop recorded in July.

Another impactor is home construction. Previously supply chain issues (the consumer prices of wood were at their highest in more than a decade) caused significant new home price appreciation which was a contributing factor to the property bubble in early 2022.

The national median listing price for single-family homes for August 2022 was $637,673, down from $663,343 in August 2021, showing prices fall by $25,670.

This price reduction trend in real estate prices continues in the province of Ontario, much to the chagrin of many a real estate agent $829,739 in August 2022, down from August 2021 housing costs of $835,124.

According to a senior property economist and chief economist opinions expressed, this is mainly due to lower interest rates that have since become higher interest rates.

These rising rates, in looking at capital economics, in contrast to the previously relaxed lending standards due to an increase in disposable income over covid-19 marked the beginning of when housing started to right-size the so-called real estate bubble.

The State of the Union


Don’t Expect a Housing Crash Like the one we saw in the 2007-2008 financial crisis

In 2005 and 2006 banks in the United States loaned money to “inferior borrowers” with low credit scores. During these years fraud by banks and mortgage lenders was widespread. Although this mainly occurred south of the border, it’s said that if the United States sneezes, Canada gets a cold.

During the subprime mortgage lending crisis there was an increasing number of defaults on mortgage payments on existing homes and, ultimately, a significantly decreased home equity and the subsequent market crash. When these mortgage rates were packaged in an exchangeable financial product or asset and sold to the global market, the tsunami housing market crash hit globally.

Will it Crash Again?

The housing economic system predicts that housing prices and the subsequent market will continue to cool down. House price appreciation outpaced incomes and the rate of approved mortgage purchase applications and their subsequent home loans bloated beyond capacity. This was always unsustainable, so a burst of the housing bubble was due, not a crash anytime.

US Housing Affordability Index vs. Canadian National Consumer Confidence

The housing affordability index from the US Federal Reserve is down 40% from last year alone. Moreover, the pressure has become visible in the corporate sector.

The House Builders’ chief executive said he had cut the company’s 2019-2024 forecast by about 45%. A drop in housing demand is making management afraid to over-invest in new projects. It seems likely we will experience a slowdown.

CREA (the Canadian equivalent to the National Association of Realtors) reports the nation’s consumer confidence continued to dive in July 2022, according to the Conference Board of Canada’s survey-based index of consumer confidence; Overall sentiment was down across all regions of the country.

In regards to expectations for their household budget over the next six months, the number of responses from those expecting stability continued trending downward, at the expense of more respondents expecting a deterioration in their overall household finances. The gap between those expressing pessimism over their future financial outlook and those expressing optimism continues to widen.

Sentiment about making major family purchases, like a home or a car, remains at historically low levels across the country. The quantum of responses from those who thought it was a good time to make a major purchase fell again in July, as the number who thought it was a bad time to do so continued to increase.

Housing Market Forecasts for the Future

Tell us the expected trends in the housing industry over the next decade: Despite declining buyer optimism in buying houses, homebuyers’ interest remains high. This is most likely true of younger buyers, who are often first-time buyers but struggle to make down payments as rental prices continue to rise.

In the same vein, sellers have expressed increasing expectations for greater deposits due to the relatively competitive housing market. This may overburden first-time home buyers who don’t have existing equity to draw upon when coming up with their down payment. The housing market will not change in this regard much for buyers in the foreseeable future; In fact, as consumer confidence struggles, sellers may be asked for buyers to have “more skin in the game” in the form of higher deposits.

The Zillow Home Pricing Expectations Survey speculates that home values would likely return, but at a slower rate by 2024 to pre-pandemic levels. The price increases in available properties have likely forced a decline in property prices.

Housing Market Forecasts for the Future


Borrowers are Less Likely to Default on their Mortgages

Despite the fact that the current housing market was less competitive in 2008, these mortgage applications today have fewer potential defaults than the ones approved during the period prior to the crisis. There are few lenders in existence today which have offered so-called “no-doc loans” to individuals whose incomes were not documented before the economic meltdown. To put it another way, safeguards have been put in place since 2008 to limit the amount of improperly secured loans. Some loan programs subsidized by government agencies also now have certain standards, such as a minimum credit score and down payment criteria.

People Less Willing to Sell their Homes Now, too.

Home prices will struggle at least through 2022, according to analysts. This can reduce people’s choice to sell their houses. This means that unless folks need to sell their homes, they may elect to sit on the sidelines until they see the stability in home prices that they’re looking for. This may also negatively impact the quality of the properties put on the market during this time.

Millennial demand for housing is up and Generation Z is Behind.

Some may say that there is no housing crisis and there’s an ample supply of prospective buyers for homes. North American Millennials or younger represent more than half of the population in today’s housing markets. This relates particularly to buyers who are first-time home buyers (that 32%) attempting to purchase a property.  Most first-time buyers’ median age is under 50, so the buyers’ pool is larger than it may seem–an indicator of strong demand. While the desire of these buyers is evident, whether these first-time home buyers meet revised stress test requirements or whether housing affordability is truly within reach for this group when home prices are coupled with increasing interest rates, is another matter entirely and one of which time will tell.

In conclusion, there are indications that the real estate market and housing prices are shifting rather than there being a crash in the housing market. Real estate experts are all noting that it’s not a burst because of the elevated housing prices and outrageous demand seen this past year and the front end of 2022 was never going to be long-lasting as it simply wasn’t sustainable. The shift that needs to happen though, is not in the market but in the minds of sellers and home prices. Gone are the times of the real estate gold rush of house prices. It’s incumbent upon sellers and realtors to reset reasonable expectations because if the property market, home sales, and housing inventory for the last two and a half years have taught buyers anything, it’s that they can wait.

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