Are buyers turning their back on Canada's housing market?

After two years of record-setting activity in Canada’s housing market, with bidding wars escalating and home prices skyrocketing, something had to give.

The slowdown of recent weeks has been pronounced, if market data from the Canadian Real Estate Association (CREA) is anything to go by: home resales posted a 12.6% decline across the country between March and April, while the actual national average home price also fell (to about $746,000) for the second month in a row.

That cooling in the market has been even more dramatic on a year-over-year basis, with national home sales falling by more than 25% compared with April 2021 – a surefire sign that the market frenzy of the pandemic’s first two years is abating.

Canadian lenders have steadily been hiking interest rates since last year, with the Bank of Canada also bringing an end to the record-low-rate environment of the pandemic by introducing a quarter-percentage-point increase to its benchmark rate in March and a further 0.5% hike the following month.

With rock-bottom rates fuelling much of Canada’s pandemic housing boom, those recent increases have had the perhaps inevitable effect of tapping the brakes on the market. What’s more: consumer confidence is in the doldrums, according to a new survey by Bloomberg and Nanos Research that reveals economic optimism is at its lowest point for 17 months.

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Those companies’ Canadian Confidence Index, which measures how Canadians are feeling about the economy, registered at 54.32 for the week ending May 13, down from 57.24 four weeks prior and its 12-month high of 66.42.

That reflected a weakening in Canadians’ confidence on the future value of real estate, according to Nanos Research’s chief data scientist Nik Nanos, with less than 18% of respondents expecting a stronger national economy in the next six months (down from 22.23% four weeks earlier).

In fact, over three quarters of Canadians expect the economy to either weaken or remain stagnant: 50.22% expect it to get worse, while 26.28% anticipate little to no change in the coming six months.

Still, that gloom hasn’t necessarily manifested in the country’s mortgage market. While there’s been a noticeable easing-off in activity over the past several weeks, applications and enquiries remain at a healthy level, according to a Toronto-based mortgage broker.

“We’re still getting inquiries for preapproval daily. While the number of preapproval requests have slowed, we’re still getting them regularly, which is a great sign,” Paul Meredith (pictured top), broker at CityCan Financial, told Canadian Mortgage Professional.

“We’ve noticed multiple people that are holding off at the moment and would like to wait it out to see what happens to the market. There are many that were looking to purchase that are now kind of sitting on the sidelines – but we also have many that are still out there, still actively looking, and feel optimistic about buying something soon.”

Those factors indicate that a large number of Canadians are still looking to purchase, Meredith said, with multiple bids and condition-free offers still common in the market despite its recent slowdown.

Read next: Toronto housing market: Will the slowdown continue?

A less frenetic buying environment is a healthy development for most parties – especially as the previous situation was simply untenable, he added.

“The market was getting out of control, and it could definitely use a little bit of a slowdown,” he said. “The rate at which it was going was not sustainable. It’s definitely good news for the market overall that more people are pulling out and that it is starting to slow.

“Hopefully this is the beginning of the return to a normal market where people can go out and buy the homes that they actually want without having to encounter dozens of offers.”

It’s also worth keeping in mind that while a rising-rate environment is sometimes seen as a cause for concern, recent rate hikes simply reflect a return to more normal conditions after the unprecedented circumstances of the past two years, according to Meredith.

“Any first-time homebuyers who are just coming into the market now have no idea how low rates were over the past couple of years,” he pointed out. “When you quote them rates, they just see these [as normal] because unless they were actively involved in looking for a home and actively looking to get into the market, they would have had no idea where rates were.”