Sizzling Cottage Market Showing Signs of Cooling. Here’s Why

Traditionally, cottage country had been an ecosystem of affordable recreational properties for both middle- and high-income families. Households would purchase a cabin in the woods, or a waterfront home to visit throughout the year and enjoy the sights and sounds of nature and a quieter pace. In the aftermath of the first wave of the coronavirus pandemic, many Canadians transitioned to a work-from-home environment, no longer confined to the office landscape from Monday to Friday, 9 a.m. to 5 p.m., prompting a shift in many Canadian real estate markets. Many people thought this trend would be the new normal on a permanent basis, prompting them to leave big cities and relocate to suburban or rural communities and in many cases, different provinces.

With solid equity levels in their pockets and historically low interest rates, many made the move to small towns and scoop up the lower-priced properties. This became the new trend in cottage country, so many sellers took advantage to sell at a higher price. As a result, nearly every segment of the Canadian real estate market enjoyed a boom, from detached houses to condominiums to cottages.

But while last year’s red-hot housing sector left many prospective homebuyers sitting on the sidelines, there is ostensibly a slowdown forming, presenting homebuyers with an opportunity to get into the market. And yes, this may include cottages.

So, is the cottage market slowing down? If so, why? Let’s explore.

Last Year’s Sizzling Cottage Market is Showing Signs of Slowing Down: Here’s Why

The sizzling Canadian real estate market might be showing signs of cooling off as interest rates begin to accelerate.

The Bank of Canada (BoC) is moving to fight inflation by hiking interest rates. This, of course, could result in a number of scenarios, such as a hard landing for the Canadian economy, a decline in the stock market, or a drop in the housing sector.

Indeed, as the nation’s benchmark interest rate creeps up, fixed- and variable-rate mortgages will respond. Economists argue that this will lead to a decline in sales and prices – just by how much remains to be seen. And recreational properties are already showing signs of decelerating in this rising-rate economy.

Muskoka is a premier cottage hotspot in the Canadian housing market. So, many industry observers look to this small Ontario town to determine the trajectory of the broader cottage market.

According to The Lakelands Association of REALTORS®, residential non-waterfront sales activity tumbled 34 per cent in April from the same time a year ago, totalling 530 units. Waterfront sales also fell nearly 59 per cent year-over-year to 104 units.

“Supply levels are still at historical lows, which means that if we see a continued moderation in sales activity, there is ample room for the market to absorb a welcome increase in available listings,” said Chuck Murney, the President of the Lakelands Association of Realtors, in a statement. “Prices are still trending near all-time highs but have begun to show signs of topping out.”

But experts purport prices are unlikely to return to pre-pandemic levels. Waterfront properties in Muskoka have skyrocketed at an annualized pace of 26.4 per cent to more than $1.2 million. Non-waterfront median prices jumped more than 17 per cent to $750,000.

Suffice it to say, according to housing market analysts, a considerable number of cottage owners are unlikely to list their properties, choosing to hold onto them instead.

That said, there is an issue that might be considered: the return to the office.

Since more companies are reopening their doors and requiring employees to return to the office, people will need to head back to the city unless they wish to restart their daily four-hour commutes. If this is the case, they might need to ditch their beautiful chalets and cabins in favour of an urban dwelling.

Bubble Talk

Is this evidence that the Canadian real estate market was entrenched in a pandemic-induced housing bubble? Before the COVID-19 public health crisis, immense speculation existed that a bubble had been brewing in key cities. Today, this bubble discussion has spread nationwide – including to Cottage Country.

Bubble or no bubble, it may be necessary to rebalance these strong seller’s market conditions. Moreover, when 64 per cent of Ontario’s cottage country, such as Haliburton, South Georgian Bay and the Kawarthas, are considered overvalued, the situation must be rectified.

Wait a minute. Sixty-four per cent? This figure was presented by the Bank of Montreal (BMO) in a new report that assessed sharp over-valuations, although broader trends indicate gains have been diminishing in a broad array of asset classes.

“Froth is coming out of home prices, just as it is across a number of other asset classes that were boosted by excessively stimulative policy,” said BMO Senior Economist Robert Kavcic in a research note. “While a much cooler housing market will weigh on economic growth, we believe that this will be largely an asset-price phenomenon, with underlying fundamentals eventually setting a floor, and the financial system well protected.”