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Quebec Real Estate Market Outlook : Getting through the turbulence

Rarely has the housing market changed so quickly in a few months. Just a year ago, very high demand and a severe lack of listings meant that buyers had to engage in bidding wars to get their hands on a property, sometimes even dropping conditions such as pre-purchase inspections. Sale times were lightning fast and prices were soaring at an annual rate of 15% to 20%, depending on the property category, across the province. Economic turmoil But since then, the economic environment has been completely disrupted by the worst inflationary surge in four decades. This forced the Bank of Canada to raise its policy rate dramatically, with the result that between March and November 2022, the interest rate on variable rate mortgages jumped by 3.5 percentage points. Meanwhile, the average posted rate for a five-year fixed mortgage increased by about 1.7 percentage points. Obviously, this has taken the wind out of the sails of the demand for properties. Many potential buyers have postponed their purchase plans, some by choice, others because they simply can’t qualify anymore. Obviously, it is the first-time buyers who are most affected. For those who do buy, it is important to remember that when rates rise, the maximum amounts that can be borrowed are reduced, which also tempers prices. The change of course in 2022 Thus, after starting the year as a lion, 2022 will end as a sheep. In the end, sales will be about 18% lower than in 2021. On the average property price side, the variation will nevertheless be fairly high this year, with an increase of about 9%. Behind this figure, however, are spectacular price increases at the beginning of the year, followed by prices that waver afterwards. Indeed, if we look at the monthly evolution of prices (to do so, we need to use seasonally adjusted data), in October we observed a 6.7% drop in prices since the peak reached in April. At the same time, the number of new listings has been rising for the past few months, but not by much. Market conditions are still in favor of sellers for the time being in most markets, but this is no longer the case on the Island of Montréal. New flight plan Taking into account the opinion of several experts, we are adopting an economic forecast scenario in which the Bank of Canada will make one last turn of the screw in December, then take a break. A mild recession is likely in early 2023 and inflation will gradually decline to less problematic levels. A reduction in the Bank of Canada’s key interest rate is then conceivable somewhere around the end of next year. As for five-year fixed mortgage rates, the decline could occur as early as the spring of 2023 with the trend decline in the inflation rate. All of this bodes well for the housing market in 2024. Headwinds in 2023 In the meantime, 2023 will be a slow year, especially early in the year, and unfortunately we will not be able to avoid price declines. While there is consensus on the latter point, it is all a matter of magnitude. Our forecast is that prices will not nose dive as some doomsayers claim, but will still lose about 6%. Where we are more optimistic than many observers is on the supply side. While many borrowers will see their monthly mortgage payments increase, a very small number may find themselves in negative equity. The number of defaults will increase, but not to a level where the panic button needs to be pushed, mainly because the strong rise in property values in recent years will allow borrowers to refinance and reamortize their loan balances as needed. Finally, it is important to remember that, from a macroeconomic perspective, the primary determinant of mortgage repossessions is not a rise in interest rates, but a decline in employment. We believe that, even if there is a recession, the Quebec job market will be resilient given the current generalized labour shortage. Therefore, the number of properties for sale will not swell significantly enough to destabilize the market. Elevation recovery in 2024 After the worst of the turbulence has passed, mortgage rates can reasonably land. The number of sales will then gain altitude again in 2024. The same is true for prices, which will take off again after their 2023 stopover.

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