The end of the real estate bubble?

June 21, 2022

While the Bank of Canada worries about the impact of the recession on a growing number of highly indebted households, the government is implementing a plan to stimulate real estate purchases. The creation of the CELIAPP and the enhancement of the tax credit for the purchase of a first home will ultimately stimulate demand. However, the real estate sector is sending worrying signals. Nevertheless, the Legault government decided to align its tax rules with those of the federal government when setting up the CELIAPP, a tax-free savings account for the purchase of a first property, a tool that the federal government created in its April budget last year. The program allows first-time home buyers to contribute $8,000 per year into a tax-free account with a lifetime limit of $40,000. Contributions are tax-free and withdrawals, including capital gains, are not taxed.

Households increasingly indebted

This demand support comes as the Bank of Canada warns that many households are over-indebted. We know that during the pandemic, many people started buying properties that were bigger, more spacious and more in line with their expectations, but the prices also left them chronically indebted. These heavily indebted households may soon have to pay hundreds of dollars in mortgage payments. Overall, rising real estate values, rising stock markets and rising liquid assets mean that the overall financial situation of Canadian households has improved since last year.

A drop in prices

Desjardins said the real estate market is going into corrections. Economists at the financial institution said the industry had just reached an inflection point and a correction was beginning, but it was not a meltdown. After a spike in prices and volumes in late 2021 and early 2022, prices started falling in March and April, with volumes down 18% since February. According to Desjardins, this will continue as rising interest rates affect demand.

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