When Will Housing Prices Come Down?

Date: Friday, May 18th, 2012

By Rubina Ahmed-Haq

The average price of a home in Canada is now $375,810. In the country’s major cities the prices are much higher. For example in Toronto the average home sells for more than half a million dollars and in the most extreme example in Vancouver the average prices are hovering above $700,000.

Massive mortgages, fuelled by cheap borrowing, are now the norm for many homeowners. But, it means many also remain on the sidelines wondering when prices will come down and if they have missed their chance to buy a house of their own. The understanding is when interest rates start to rise, home prices should come down, but this will be coupled with more expensive cost of borrowing. It’s leaving homeowners in a very confusing position.

In the next 12 months there are several scenarios possible. Here are three that I think are most likely.

Canadian housing prices continue to rise

Canada has been in a bull housing market for the better part of 20 years. But despite prices rising for so long and so quickly, our major cities remain a bargain compared to other cities around the world. New York, London, Paris and many others are still suffering with much higher home prices. The ability to handle debt is also better for Canadians compared to Americans. If interest rates stay low or rise slowly, the appetite to spend more on homes could remain.

Housing market has a 20 per cent correction

In Canada’s biggest cities some first time homebuyers have been prices out of the market. This is a very important group of buyers who make up more than 50 per cent of total real estate sales. Those who have the drive to buy will remain on the sidelines and more people who remain there means sellers will have to lower their prices to lure those buyers back in.  A 20 per cent correction could be the discount new home buyers need to be attracted back to real estate market.

This could be the beginning of a decade of decline

As home prices have been steadily rising for two decades imagining a steady decline for 10 years doesn’t seem impossible. As soon as interest rates rise home prices could start their decline to reflect the higher cost of borrowing. If interest rates rise steady to more normal levels, overnight lending rate at 4 percent and prime 6 per cent, it could take years to get there. This means Canadians could see a steady decline in home prices as well.


The only thing for certain is interest rates eventually have to start coming up. Bank of Canada Governor Mark Carney has been hinting for months that could start as early as Fall 2012. What we don’t know is how the housing market will react.  If you are in the market to buy a home, purchase one you can afford today and when rates rise. You can do this by calculating your affordability based on a higher interest rate. I recommend at least 2-3-percentage point higher. For example if you are getting a mortgage rate at 3.5 percent, pay your mortgage as if the rate was 5.5 percent. This means you will be prepared when your mortgage comes up for renewal and when rates start to rise.

Rubina Ahmed-Haq

Rubina Ahmed-Haq

Rubina is a finance writer whose career spans three continents in TV, radio, print and online. She is a resident finance expert on CBC's Steven and Chris . A regular contributor to The Toronto Star’s Moneyville.ca, finance editor at Homes Publishing in Toronto and writes a monthly column for Mississauga Life Magazine. As a business reporter she has worked for CP24 from the Toronto Stock Exchange and reported for BNN. Before becoming a business reporter, she worked as an anchor and reporter at CBC, BBC and ABC in Canada, England and Pakistan. Her personal blog is www.alwayssavemoney.ca.

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