Desperate potential purchasers now trapped in a flurry of real estate bidding wars
Even though Canadian housing prices are rapidly declining after jumping during the coronavirus outbreak, consumers are still being hit hard by skyrocketing rents and declining purchasing power due to rising interest rates.
During the epidemic, when property prices in Canada soared by more than 50% in just two years, desperate prospective purchasers found themselves embroiled in a frenzy of real estate bidding wars.
According to real estate agents and media sources, the competition has now shifted to the rental market, where landlords demand months' worth of rent in advance and occasionally even put renters up against one another to see who will pay more.
Citing data from Rentals.ca, Reuters reported that the average rent for a one-bedroom apartment in Canada has increased by 13.7% since the beginning of the year, with hikes of 18.5% in Toronto and 19.2% in Vancouver.
Dan Scarrow, president of Macdonald Realty in Vancouver, said the change from frenetic demand for homes-to-buy to homes-to-rent makes clear a larger problem with Canadian housing: that there is simply not enough of it.
"Higher [interest] rates are not destroying demand for housing, it's just shifting the demand from buying to renting," he told Reuters. "The demand just sloshes between renters and buyers, depending on where rates are so long as you have constrained supply."
To combat inflation, which reached a nearly 40-year high of 8.1% in June, the Bank of Canada increased its policy interest rate from 0.25% at the beginning of the year to 2.5% now.
In Canada, the average home price has dropped by 18.5% from its peak in February because of the quick increase in borrowing costs, according to data from the Canadian Real Estate Association.
However, lower prices don't seem to be benefiting prospective purchasers, who can no longer obtain loans due to significantly higher mortgage qualification rates. And as a result, the demand for rentals is increasing.
Real estate professionals claimed that the strong rental market has put a floor under condo prices in major cities, giving investors the confidence to wait through price declines and even look to purchase additional investment properties.
Inflation data for Canada are beginning to reflect the move from owned to rented housing, with rises in homeowners' replacement costs falling substantially to 10% from 13% in April while rent inflation is still close to the 32-year high reached in April.
Mortgage interest rates are suddenly rising after falling dramatically as the pandemic spread and rates were lowered. The homeowners who took out variable loans or whose mortgages are up for renewal are the ones who are feeling the pressure the hardest.
"Right now is actually one of those unique moments where buyers, sellers, and renters are probably all struggling," said Scarrow. "Usually, there is a winner. But I think this time it's a struggle really for everyone."
