First-time homebuyers: Home prices expected to drop by 2015

Posted by Jeff Trounsell (jefftrounsell) on Aug 14 2012
Blog >> August 2012

First-time homebuyers, get ready: Home prices expected to drop by 2015

January 2015Magnifying glass

Canada's hot, hot, hot housing market is doing what experts hoped: It's actually showing signs of cooling. Although housing prices steadily increased through June, groundbreaking for new homes decreased and fell below the number of expected housing starts predicted by analysts.

The government's decision to tweak mortgage rules – which make it more difficult for first-time homebuyers to secure home loans and get the best mortgage rates, leaving some experts wondering if the rule changes will actually help in the long-run – could possibly cool the market further toward the end of 2012. The current homeownership level in Canada is at an all-time high at 70 percent, which experts estimate could be a peak based on U.S. and Australian trends.

However, the rule changes may not have much impact on the number of new home constructions until late 2012 or early 2013.

Although the aforementioned first-time buyers who might feel scorned or discouraged by the rule changes may now be required to save more money before beginning their search for a dream home, Scotiabank has some good news: Home prices in Canada are expected to drop 10 percent by 2015.

Experts have been quick to predict that this housing price decline is not likely to be as sharp or damaging as housing decreases in the United States and Europe. This may be attributed to the fact that Canadians' household equity in real estate assets hovers around 67 percent, compared with 41 percent in the United States.

Considering it can take a first-time homebuyer two years to save a down payment of 5 percent or less, and between one and four years to save a down payment of 10 to 20 percent – this may mean buyers could potentially get more house for less money. On top of that benefit, they could also experience less financial stress by using the money they save to create a cushion for unplanned expenses.

Fortunately, the good news doesn't end there. Experts not only agree with Scotiabank's future forecast, some analysts predict home prices could drop as low as 25 percent.

“After this period of very strong home sales, where you’ve essentially got home ownership across most demographics at record levels, even for young buyers, combined with tighter mortgage rules and the like, there’s just not going to be the same amount of demand out there,” Adrienne Warren, an economist for Scotiabank, said.

However, this recent report could be bad news for two demographics, according to Scotiabank: Baby boomers who will want to downsize in the near future and could possibly lose some net worth if property values fall, and condominium owners – typically young professionals – who have little equity and could lose money if they try to sell.

There is risk of condo oversupply, which at the moment is a quickly growing condo market with many ongoing construction projects in Toronto and Vancouver. The increasing number of units and the possibility that many of the units could go unsold creates more of a risk for "sharper price correction" and decreasing value.

However, not all experts believe that 70 percent home ownership in Canada means housing prices will drop so drastically, so quickly.

"I'd say in the medium-term in 2012 to 2013, it's highly unlikely we'd see a double-digit decline in national average house prices," said Phil Soper, president of Royal Lepage, one of Canada's largest real estate companies.

Last changed: Aug 14 2012 at 9:31 AM

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