How Canada's market shift is affecting purchases and renewals

The recent cooldown is having an impact on Canadians’ attitudes toward buying, says digital mortgage platform

How Canada's market shift is affecting purchases and renewals

There’s been a marked slowdown in Canada’s housing market in recent weeks – a fact that’s reflected in the latest report from digital mortgage platform nesto, which indicated a 10% decrease in new purchases and a growing number of early renewals in its May data. 

That comes as little surprise in the current rising-rate environment, which has seen the Bank of Canada signal an end to the rock-bottom rates that fuelled an unprecedented surge in the country’s housing market during the first 18 months of the COVID-19 pandemic.

Despite showing some signs of moderation in certain markets, home prices across the country remain prohibitively high for many buyers, with nesto reporting that the median down payment has risen to 20% (up from 16% in March) as the median home price registered a $50,000 increase.

Read more: Down payment on a house in Canada: What you need to know

Rates are increasing on both the fixed and variable fronts, but fixed rates are still rising significantly quicker than their variable counterparts – meaning Canadians who choose a fixed option usually have to qualify at the contract rate plus 2%, compared with 5.25% for variable borrowers, thanks to new stress test rules introduced last year.

“There are a lot of levers right now currently making the variable rate attractive,” nesto’s co-founder and principal broker Chase Belair (pictured top) told Canadian Mortgage Professional.

“The penalty is so much smaller, the spread between the variable and the fixed is massive, and you qualify for more money on the variable today. Until two out of those three levers disappear, I think the popularity [of variable rates] will remain.”

Read next: A Canada housing crash? Don't count on it, says RBC economist

Aside from record-low interest rates, a potent cocktail of factors spurred Canada’s pandemic housing boom: the work-from-home revolution, a common desire for more space, and higher savings among many Canadians because of restrictions on tourism, restaurants, and other leisure.

At this stage, those who were desperate to purchase a home have likely already secured a property, while prospective buyers who were in two minds could be given pause for thought by rising rates, according to Belair.

“The sentiment and excitement around buying a house has wavered a bit. Those who were on the fence are no longer in that rush mentality,” he said. “They’re a lot more comfortable with sitting on the sidelines than they were previously.”

According to nesto’s new data, 70% of users were “just looking” in December 2021 – a number that’s now dropped to 52%. Thirty percent (30%) of “ready to buy” users is now up to 48%, a development nesto said showed that “ready to buy” users were determined to purchase as soon as possible while those in the early stages of the buying process were changing their minds.

“Those who are seriously trying to get into a house as soon as possible have put their foot on the gas pedal, and those who were just preapproved and looking for an opportunity – they’re more on the sideline now than they were previously,” Belair said.

Impending further rate hikes and consumer price index (CPI) inflation – currently at its highest level for more than three decades – mean many Canadians are soon set to feel the pinch in financial terms.  

Read next: Mortgage market feels the impact of rising rates

With that in mind, Belair highlighted the importance of ensuring that clients have the right cash flow entering that uncertain economic environment, and that they keep their revolving credit or consumer debt at a low and manageable level.

“A lot of our refinance transactions today, including our early renewal inquiries that turned into refinances, are borrowers that are winding up all their debts into their mortgage, making sure that their monthly payments are as low as possible to enhance their cash flow,” he explained.

That should be a top priority for mortgage professionals, Belair said, with a significant economic shift coming down the line for the remainder of this year.

“The best thing that we can do for our customers today is to make sure that they’re in a position where their monthly income can satisfy all their current needs and potential expenses coming up around the corner, keeping in mind that life is about to get more expensive for most of us,” he said. “So we should be less opportunistic and more protectionist when it comes to our cash flow.”