so Ive been pondering things regarding the possible price drop for the housing market and I would like to hear other opinions.
1) as interest rates rise buyer loose the ability to purchase homes due to carrying costs of the mortgage( I dont see the BOC going to much further).
At least another 1 to 2 percent more
2) inventory is building and the market is stagnant
Market has not been totally stagnant, but inventory of listings has been building in most places. People tried to jump in at the end to get the big bucks, so extra listings rolled in when activity on the buy side dried up.
3) the cost to build new houses have increased due to material shortage, increased labour and material costs
Yep, during Covid all of that happened. Some material costs have moderated, but still some shortages of materials and labour.
4) population continues to increase
Depending on immigration mostly
5. popular area is limited
6) more than likely people will hold onto their current home unless they really need to sell
For some, yes, but others want to just move on even though they don't need to
7) please add any other contributing factors you may think apply
so given the above how could house prices drop significantly(lets not go the radical route of insane interest rate like in the 80s)?
if it costs x per square foot to build a home. wouldnt it make sense that the lowest price for a home would equate the actual cost to build a home?
Supply versus demand is always a moving thing. Listings and sales activity are not that different than historical averages, but vastly different than during the big bubble of the last couple of years. With replacement cost it is true, and always has been, that you would not pay a lot more for a house than it would cost to replace it. But houses go with property, and if you want to be in a certain place that is what you may be paying a lot more for. And for older houses you may get an older house for a lot less than replacement cost (plus land) because of various sorts of depreciation.
The big factor in my opinion is just the overall total price of housing...say in Toronto, and who can afford it. The big change with interest rate changes is in the "first time homebuyer" category. Interest rates have doubled for many of these - last year you could get 1.5% mortgages for example, and the same mortgage terms might now be at 4.5%. Even with an amortized payment the total payment (p+I) may well be twice what it was. I have not done the calculation so don't burn me on that, but the point is there. And to add to that the rate that buyers are "qualified" at for house mortgages involve stress tests at much higher (5 year I think) rates, thus reducing the mortgages people qualify for by 20% or more.
All of that to say...you take out the first time buyer, or reduce the number, and it cascades through the whole chain. Second home buyers don't get as much for their first home, etc.
We may be down 20 to 30% in some markets already, and I doubt it will drop a lot more, but who knows. On the other hand I can't see big price rises for a number of years, until rates go down and incomes go up, etc. There is and will be huge pressure on rental markets, and a lot of social upheaval on that because tenants will be pressuring governments for rent controls of all types, and builders and renovators and homeowners will be hesitant to create rental units because of all of that. But as the cost of rentals goes up the pressure is on for people to find some way to own. So the bottom end of the condo market, and perhaps marginal areas will see a lot of buyer interest.
