Canadian buyers who purchased their home in the first quarter of 2022 and are now dealing with the reality of it having a lesser value should expect it to stay that way "for a while," a new report from BMO says.

Home sales slid 12.6% in April, dragging nation-wide activity down 21% from one year ago. The report, written by BMO Senior Economist and Director of Economics Robert Kavcic, says that demand fever in the Canadian housing market has officially broken, spurred by rising interest rates from the Bank of Canada, and that the housing price index is poised to drop another 10 - 20% in specific regions.

"Just to reinforce again how heated the demand side was, despite one of the largest two-month declines in sales that we’ve seen historically, activity is still almost 10% above pre-COVID norms, while the raw April sales tally was one of the highest on record," Kavcic wrote. "But, it’s clear that market conditions are changing quickly."

READ: Interest Rate Hikes Could Lower Canadian Home Prices by 10%

Limited inventory has plagued markets across the country throughout the pandemic, contributing to fierce bidding wars and skyrocketing home prices. But in April, the national sales-to-new listings ratio fell to 66.5% -- something that Kavcic says shows the market is "quickly heading back towards balanced conditions."

With that comes lower home values, which markets across Canada have already seen in recent months. Although prices nation-wide still sit 23.8% above what they were one year prior, the national MLS Home Price Index fell 0.6% in April. In many markets, Kavcic says, "anyone who bought a home in the first quarter of 2022 is going to be looking at a value below purchase price for a while."

Ontario markets are being hit the hardest -- and fastest -- with sales across the province plunging 21% in April, bringing them back to pre-pandemic levels. Vancouver and Montreal appear to be holding up better with relatively balanced markets, Kavcic says, while Alberta markets and those in Atlantic Canada are stronger.

A report from RBC, also released on Monday, noted a 5.6% increase in the MLS Home Price Index in Halifax-Dartmouth, as well as a 3.2% jump in Saint John prices, and a 2.7% increase in Fredericton.

"The resilience in Atlantic Canada and the Prairies can be largely explained by their relative affordability," the report reads. "Lower priced markets are less sensitive to rising rates."

As a re-energization of urban markets has been ongoing, the suburban markets are feeling the brunt of the market correction. Ontario's suburbs in particular are seeing the most meaningful price declines, with single-detached and townhomes cooling the quickest. The Toronto core, however, is sturdier, seeing much smaller declines.

The RBC report noted that in southern Ontario, London -- one of the cities that saw a boom during the pandemic -- experienced a 4% drop in the MLS Home Price Index in April, with Cambridge following closely behind with a 3.9% decline. How much more of a drop homeowners can expect to see in value will largely depend on future Bank of Canada rate increases, the BMO report says.

"Market psychology and affordability has been seriously tested by 75 bps of Bank of Canada tightening, and we expect another 100 bps of rate hikes through July, and 125 bps by the end of the year," Kavcic wrote. "That effectively means that the market will go from being priced at mortgage rates of roughly 1.5%, to somewhere in the 3.75%-to-4.5% range, depending how bond yields evolve (five-year fixed rates are already widely above 4%)."

But also at play is the country's rising inflation rate. How the economy handles tighter monetary police and when inflation breaks will help to determine how long the price drops go on for.

"Specifically, can central banks engineer a soft-ish landing that allows the cycle to run on?" Kavcic said. "If not, what is now an asset-price correction could evolve into more prolonged economy-driven weakness, but that is not our base-case view."

The RBC report similarly credited the rising Bank of Canada rates with reining in housing activity, saying that the market has likely peaked this cycle.

"We think the sizable drop in activity in April marks a turning point for the Canadian market with further cooling on the way," the report reads. "The Bank of Canada’s setting out to aggressively normalizing its monetary policy is a game-changer for the market -- turning what has been a tremendous tailwind into a stiff headwind for the market."

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