One of the world’s bubbliest housing markets is tilting from sellers to buyers with dizzying speed.

One of the World’s Frothiest Housing Markets Turned Into a Seller’s Headache Overnight

House hunters from Toronto to small Ontario suburbs are changing how they navigate the tight housing landscape with interest rates heading higher.

A string of central bank interest rate hikes has flipped the switch on Canada’s white-hot real estate market, spurring the first national home price decline in two years. That has both buyers and sellers in some of the frothiest pockets scrambling as they try to navigate an unusually rapid shift in the country’s housing landscape.

In some cases, people are turning to high-interest bridge loans to get themselves out of tough situations, according to Bruce Joseph, founding director of Trident Mortgage Investment Corp. His alternative lending firm, based in Barrie, typically serves a niche market of high networth business owners who can afford to pay interest rates around 7% for financing tailored to their needs. Now that borrowing costs across the board are up — the average of major banks’ five-year mortgage rates runs at 5% — some people who already bought new homes are struggling to offload their old ones. That’s when they turn to alternative lenders like Joseph:

“I think we have a group of people that kind of got caught with that market turning,” Joseph said. “We just came out of a very aggressive sellers’ market, and moved very quickly into a buyers’ market, so their strategy made a lot of sense until really the last several weeks.”

Cooling Market

Several Ontario cities saw price declines last month.

They’re not the only ones getting caught by the sudden shift. Mom-and-pop real estate investors in some places have seen their prospective margins from new purchases evaporate with the rise in borrowing costs, potentially sidelining a source of demand that came to account for a fifth of the market nationally through the pandemic.

And those who took out shorter-term subprime mortgages — which account for 1.3% of Canada’s loan market — now face the prospect of having to refinance at double the cost. That could introduce forced sellers and distress to the market.

Whether it all amounts to Canada’s long housing boom facing just another dip or something more severe will depend on how many people find themselves in trouble, and whether that trouble develops a momentum of its own. So far, the sudden market shift has been uneven, with places that saw less extreme run-ups holding onto their gains or even strengthening, while the cities and towns in Ontario that were at the forefront of the pandemic boom are suddenly tumbling.

“The demand fever in Canadian housing has broken,” Robert Kavcic, a senior economist at Bank of Montreal, wrote in a note Monday. He says there could be a 20% drop from peak values in some of the markets that saw the biggest gains the last two years.

“Let’s say that we’re just getting started,” he wrote.


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