Homeowners have lost billions in the wake of the real estate downturn

The prospect of a cooling market has often been touted as an opportunity to invest in real estate. But despite a 20% drop, the average price of a home in Canada is still at the same level it was at the start of 2021.

I consider it like letting the air out of a balloonsays Colin Cieszynski, chief market strategist at SIA Wealth Management. You don’t necessarily want this to break out, but prices needed to come down to something a bit more sustainable.

Falling house prices have contributed to the biggest drop in household wealth the country has ever seen, according to Statistics Canada.

billions lost

Much of household wealth is tied to house prices and they have just taken a hit with these declines. The sector itself remains one of the main contributors to Canadian GDP.

According to Statistics Canada, the net worth of Canadian households – defined as the value of all assets less all liabilities – fell by $990.1 billion in April, May and June.

This fall was compounded by a $389.8 billion decline in the value of non-financial assets as the run of gains in real estate that began in late 2018 was interrupted by a weak housing market. struggling with rapidly rising interest ratesthe federal agency wrote in a statement last week.

The drop in household wealth is also attributable to the fall in stock markets in the second quarter, despite a slight recovery in recent months.

You should know that Statistics Canada figures are for the period that ended in June. Real estate losses accelerated in July and August.

Ripple effect on the economy

Falling house prices have a ripple effect on the rest of the economy, like spending on building materials, furniture, all that kind of stuffsaid BMO chief economist Robert Kavcic.

We have more depressed real estate activity which will dampen real economic growth which, in turn, will dampen job growth, he added.

With rising rates, consumers could postpone buying furniture, for example.

Photo: Ben Nelms

As home values ​​skyrocketed in recent decades, homeowners felt wealthier. They borrowed and spent more, using the ever-increasing value of their home as a sort of ATM.

As values ​​fall and interest rates rise, homeowners are less likely to borrow and spend.

High interest rates will also slow the economy in another way, Kavcic said. If your mortgage payment goes up by $500 or $1,000 a month, that immediately eats away at discretionary spending that you might otherwise be spending elsewhere in the economy.

A situation made worse by inflation

The situation is all the more complicated as global inflation affects purchasing power and diminishes the effect of wage increases. All of these factors encourage consumers to reduce their spending.

If you don’t go out for dinner anymore, well, that’s one less sale for the restaurant on the corner and maybe at some point a few less jobs.illustrated Mr. Kavcic, of BMO, who expects difficult days.

If inflation persists as higher interest rates hurt the economy, he says, central banks, including the Bank of Canada, may have to raise rates further to calm things down. raised as long as necessary.

Ultimately, all this generates turbulence for the stock markets and the real estate sector, bringing in their wake an even more marked decline in household wealth.

We will know more next week when the inflation data is released. The figures are expected to show a decline in inflation, which hit a 39-year high of 8.1% in June, despite the rising cost of goods and services and falling prices at the pump.

With information from Peter Armstrong of CBC News

Follow by Email