Are real estate prices going to go down? This comes with a warning.

Tuesday Apr 27th, 2021



I hope you are doing well.

This comes with a caveat. 

I do not have a very good track record when it comes to predicting the market. Back in 2001 following 9/11, I thought prices would go down. I was wrong. In 2008 during the "Great Recession," I predicted that prices would go down. I was wrong. Back in March 2020, I predicted that prices would go down as no one would dream of buying a house in a pandemic with so many unknowns. I was wrong.

The question of the day is are real estate prices going to go down.

Given all that is going on in the world right now, it would seem so. 

Ontario is in lockdown. We are in the middle of the 3rd wave of Covid 19. New variants are appearing seemingly on a daily basis. 

There is no question as to why there is such a surge in real estate prices. 1) Interest rates. They are at an all-time low. People are taking advantage of this. Buy now before the rates go up. Plus there is the FOMO effect. Better buy now before prices go up even more. 2) People are moving out of the city. Due to the new normal, working from home has caused people to reevaluate their living arrangements. They want more space. They no longer have to commute to work, so living further from downtown Toronto is not a problem. They want a backyard. So the logical conclusion is to move to a small town outside of the city. People are expecting that they will not have to go into the office at all or at least not as often once the pandemic is over (if that is even possible). 3) People are cashing in, downsizing or selling and renting with the hopes the prices go down they can get back into homeownership at a reduced cost. 4) What we are missing from the equation is immigration. That has been a steady driver of price and sales increases. 

Could all these buyers be wrong?

Let's think about this.   Here is the latest news from the Bank of Canada. Here is another article from April 21st. 

Bank of Canada will hold the current level of policy rate until inflation objective is sustainably achieved, adjusts quantitative easing program

Bank of Canada Shifts Expectations Upward

The Bank of Canada held its 3rd meeting of the year on April 21st, 2021. Highlights from the meeting include:

  • the Target Overnight Rate will remain at 0.25%. (Unchanged from prior meeting)
  • CPI inflation is expected to exceed its 2% target in the first half of 2021 before stabilizing at 2% in the second half of 2022
  • The Bank of Canada's Quantitative Easing (QE) program will continue with at least $4 billion a week in asset purchases. (Unchanged from prior meeting)
  • The Bank of Canada expects a rate hike as early as the second half of 2022 (revised from 2023)

Q1 2021 has shown better-than-expected growth for Canada's economy with real GDP growth expected to reach 6.5% in 2021, 3.75% in 2022, and 3.25% in 2023. This growth has been accompanied by significant housing market activity as well as rising prices. As a result, the Bank of Canada has shifted its monetary policy to expect a rate hike as early as H2 2022.

This change signals the willingness of the BoC to change its policy in the face of new data and suggests that further policy changes are yet to come, especially as inflation figures in the next year are expected to exceed the Bank of Canada's target of 2%. We have adjusted our target overnight rate forecast with the data from this announcement as well as other market information.

The Bank of Canada has shifted its thinking. No surprise. They have to be nimble. As they cannot predict the future any better than anyone else they have to be able to make changes as they go along. They didn't think they would be increasing the interest rate until 2023. This encouraged real estate sales, as buyers felt they would not be subjected to higher mortgage rates for at least five years. The thinking was also that the prices would keep going up. 

Case scenario 1.

Buying a $1,100,000.00 house with 20% downpayment. Somewhere in Ontario other than the City of Toronto. 

1.Downpayment $220,000.00

2.Costs incurred with the purchase. $20,575.00 includes land transfer tax, Ontario. Lawyer fees, title insurance. Does not include the cost of moving company. So cash needed to make this purchase would be $240,575.00, A quarter of million dollars. 

3. $880,000.00 1st mortgage, amortized over 25 years with a fixed 5-year term with an interest rate of 1.68%. The monthly payment principal and interest is $3,592.00. Add property tax, monthly debt payments (car loans, credit card debt, etc.) utilities, property insurance, phone, cable, internet and you have a monthly carrying cost of approximately $5,553.00. To qualify for this purchase the household annual gross income needs to be $168,400.00. 

4. After the first 5 years of the mortgage the principal balance would be $732,150.00. Not bad right?

5. If interest rates stay the same (they won't, they can't go any lower) then no worries, your payment stays the same. Property taxes, utilities, the internet will go up but let's hope your income goes up with the rate of inflation. Now if interest rates were to rise to say 5% (still low as far as interest rates go) then your monthly principal and interest payment go up to $4,258.00. That is an increase of $666.00 per month or about $8,000.00 per year. That doesn't sound too uncomfortable. 

Case scenario 2.

Let's say prices continue to rise at the current rate of 32% year over year. That would mean the same house being bought in case scenario 1, would now be available for sale at the price of $1,452,000.00. Now let's take that one step further, 24 months from now that same house purchased now would be listed for .... wait for it... $1,916,640.00. 

Does it make any sense that prices will continue to rise at their current rate? Nearly doubling your money in 24 months just doesn't seem possible or realistic. Is people's income going to rise that much? It doesn't seem likely. Inflation would come into play at some point. Right now we are seeing the effects of inflation in the lumber industry, fuel, and food. 

The logic on real estate prices says that we will see a slow down in demand, more listings come on the market resulting in prices to flatten or go down slightly.

My only hope is that we don't see a crash in real estate as there could be a lot of people with negative equity in their houses (underwater). And that would cause a whole lot of hurt.

Thank you for reading.

Stay safe,




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