Real Estate in 2023: Impact of Interest Rates and Budgeting

When we talk about real estate in 2023, the issue will have been that of interest rates and its impact on our budget.

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Many Quebec owners have had an unusual year, and not a relaxing one for the wallet. Over the course of 2023, some homeowners saw their monthly payments double, while others with fixed payments saw the term (amortization) of their mortgage increase by 10 or 15 years, if not more.

“We have never talked so much about the key rate. In 2023, you need to know what that means if you are in the real estate market because it directly affects your actions. It was an element to constantly monitor for those who were buying or those who wanted to renew their mortgage,” says Mélanie Bergeron, real estate broker.

However, the Bank of Canada increased the key rate by… only 0.75 percentage points during the year, points out Stéphane Bruyère, mortgage broker at Mortgage Architects.

“The story of 2023 is the realization that the real effects of 2022 have begun. What we suffered in 2023 is the impact of the increases from the Bank of Canada in 2022,” he explains. In fact, the Bank increased the key rate seven times in 2022, from 0.25% to 4.25%. However, when the Bank of Canada makes a decision, the impacts on the economy are felt 12 to 18 months later.

“We’ve been saying for a long time that this is going to happen and hit hard, but we started to experience it hard in 2023. The credit lines that have gone up, the mortgages, and the people who are starting to slow down their consumption because They’re starting to worry.”

No price drop

In 2023, prices remained generally stable. Some properties have decreased in price because people had no choice, or parted ways and had to sell quickly. But overall, sellers still got the short end of the stick in 2023.

“It was a return to pre-pandemic, to normality,” says Mélanie Bergeron. After two years of launching left and right with excessive prices and often above their budget, people started to take their time again and to shop around, to analyze what it is really worth,” she says.

We went from around 50 visits per weekend to a house and around twenty promises to purchase, to around two or three. Many people have withdrawn from the market, explains Mélanie Bergeron.

“But we have not seen in 2023 the turnaround in the situation that many anticipate and the drop in prices that would accompany it. The seller still gets off very well, even if he has to negotiate a little more.”

Sales falling, but prices holding up

Weighed down by mortgage rates maintained at still high levels in 2023, residential activity will have, for a third consecutive year, declined sharply in the province. The Professional Association of Real Estate Brokers of Quebec speaks of a decline of 13% compared to 2022, which year also recorded a decrease in transactions of 20% compared to 2021. In greater Montreal, the same trend was observed. imposed, although with even more intensity: the number of transactions decreased by 15% compared to 2022 and by no less than 35% compared to its peak in 2020. That said, despite longer sales times, Low inventory allowed sellers to keep prices at least where they were last year. In Quebec, the median price of a single-family residence today stands at $413,200, an increase of 40% since 2020. In the Montreal region, the median is $539,800 for a single-family home and 390 $200 for the condo, respective increases of 35% and 28% compared to 2020.

Housing and Affordability: The Catastrophe

Home ownership remains one of the most problematic and underestimated issues of the Trudeau and Legault governments. The maintenance of the key rate by the Bank of Canada and the slowdown in the job market have significantly undermined consumer confidence in recent months. When it comes to housing, they have never been so pessimistic in 20 years, notes National Bank (NBC) economist Daren King. The indices are breaking unaffordability records which take us back to those of 1980. Unfortunately, the rental market is hardly more accessible. The housing shortage combined with a context of migratory explosion – the country’s population grew by 3.2% in 2023, the largest increase since 1958 – amplifies the phenomenon. The Canada Mortgage and Housing Corporation (CMHC) predicts that the rent for a two-bedroom apartment (a 4 and a half) in Montreal will increase by 10% in 2024 to reach an average of $1,230 per month, or 14,760 $ per year. To stabilize the situation, the industry estimates that 600,000 homes would need to be built per year, double the record ever reached to date. In the short term, no one believes it.

Rents are exploding

The imbalance between supply and demand continued to make life difficult for tenants and housing seekers. Rent prices have exploded by 13.7% in Quebec in just one year, the largest increase in four years, according to data compiled by the Regroupement des committees logement et associations de tenants du Québec (RCLALQ). In Montreal, the average rent price increased by 14%, while in Quebec, rents increased by 19% compared to last year. A new bill (31) could be adopted in 2024, which aims to regulate the rights of tenants. But several aspects remain subject to debate, for example the transfer of lease or the burden of proof to be presented by owners who wish to evict tenants.

Housing construction declines

While the housing crisis is in full swing, residential construction is declining across the country… During the first six months of 2023, housing starts fell by 58% in the census metropolitan area (CMA) of Montreal compared to at the same time in 2022, according to the Canada Mortgage and Housing Corporation (CMHC). Heavy regulations as well as rising interest rates and inflation which impact construction costs are slowing building construction across the country. CMHC estimated last summer that 3.5 million additional units will need to be built across the country to restore market balance.

The “mortgage bomb” is ticking…

The massive renewal of mortgage loans taken out during the pandemic will lead to the possible sale of properties, says Philippe Lecoq, president of the Proprio Direct banner. Many people took out five-year mortgages during COVID times, at rates as low as 1.5%. When they have to renew their loan – and many have already started – their mortgage payment will jump, since current rates are much higher. According to RBC, 60% of mortgage loans in the country will need to be renewed over the next three years. In 2024, around 20% of mortgages will have to be renewed, and this will rise to 40% in 2025, underlines Philippe Lecoq. “We can therefore foresee the return to an active market, which will calibrate the current serious imbalance between supply and demand,” he says.

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