With interest rates on the rise, many pockets of the Canadian real estate market are beginning to witness a slowdown of sorts, as borrowing costs and the mortgage stress test intensify. Does this spell the end of the housing boom or a temporary reshuffling?

It’s no surprise that this conversation is happening. Since the Bank of Canada (BoC) started discussing the possibility of tightening monetary policy in 2022, there had been an almost guaranteed expectation that the central bank would douse the red-hot housing sector amid its fight against inflation. Whether it would succeed in putting a damper on some of the hottest markets or not remains to be seen. But the numbers point to a modest decline in certain Ontario housing markets.

One of the most lucrative segments of the Ontario housing sector has been the Kitchener-Waterloo real estate market, with detached homes costing north of $1 million. But there is a debate if the municipality can sustain these massive price levels.

Kitchener-Waterloo Real Estate Spotlight

According to the Kitchener-Waterloo Association of REALTORS® (KWAR), residential property sales tumbled at an annualized rate of 22.7 per cent in May, totalling nearly 661 units.

Every residential property category posted a decline in sales:

  • Single-Family Detached: -16.7 per cent
  • Semi-Detached Homes: -36.5 per cent
  • Townhomes: -38.5 per cent
  • Condominiums: -12.0 per cent

Price growth has been a riveting development in the Kitchener-Waterloo real estate market. The average sale price for all residential properties advanced close to 18.3 per cent year-over-year in May to $875,194. However, at a monthly pace, the average sale price dropped 3.5 per cent.

Year-over-year, all residential properties posted declines in May:

  • Single-Family Detached: +17 per cent to $1,016,834
  • Semi-Detached: +10.7 per cent to $730,768
  • Townhomes: +17.7 per cent to $708,722
  • Condominiums: +19.7 per cent to $545,825

Does this mean the Kitchener-Waterloo real estate market will begin stabilizing?

“The increase by the Bank of Canada to the key interest rate in April had the predictable result of knocking some buyers down if not out of the market in May,” says Megan Bell, President of KWAR. “While the impact to prices is small, it has had a critical impact on some buyers and what they can now afford.”

In addition to the BoC pulling back the flood of cheap money into the real estate market and the broader economy, industry observers will be monitoring supply levels in this part of Ontario.

Association data highlight that new residential listings surged 33.9 per cent year-over-year in May, with 1,422 units. This is also more than 40.4 per cent above the 10-year average for the month of May.

Active listings also increased, climbing a whopping 98.2 per cent year-over-year to 902 units. However, this is 28.8 per cent below the 10-year average for the month of May.

The number of months of inventory rose to 1.6 months, up from 1.2 in April. Market analysts use this figure to determine how long it will take to exhaust current supply levels at the present sales inventory rate.

Moreover, the average number of days to sell a home in the Kitchener-Waterloo real estate market rose slightly to 11. The five-year average is 16 days.

“With the announcement from the Bank of Canada about another interest rate hike this week we may see a resurgence of buyers who have locked in at a lesser rate, but as borrowing costs continue to increase, we should expect demand will continue to soften, particularly in the more entry-level segment of the market,” says Bell.

A problem forming in the Kitchener-Waterloo area is the lack of new housing construction. According to the Canada Mortgage and Housing Corporation (CMHC), housing starts collapsed 77 per cent year-over-year in April. In the first four months of 2022, housing starts have totalled 830, down 62 per cent from the same time a year ago.

Housing Affordability

Overall, housing affordability has significantly eroded since the coronavirus pandemic, according to a new report from Generation Squeeze. The study revealed that home prices spiked 44 per cent throughout the pandemic, the highest rate in about 50 years. The report noted that a new homebuyer would need to work full-time for 22 years to accumulate enough of a 20 per cent down payment.

Ontario has just completely lost control of housing,” said Paul Kershaw, an associate professor at the University of British Columbia and the founder of Generation Squeeze. “We’ve never seen anything like this before in any province at any time in the last 50 years.

And Kitchener-Waterloo, a beautiful small town a couple of hours away from Toronto, has endured the same trends. Perhaps a rising-rate environment will make conditions more affordable, but it might depend on how high rates will be over the next 12 months.