Canadian home prices are expected to bottom out early this year with a more than 20% peak-to-trough decline.

In a recent Provincial Housing Market Outlook, TD Economics reiterated its projection that national average home prices will decline by 20.9% year-over-year in the first quarter of 2023.

The Maritimes, Ontario, and British Columbia will see steeper annual average price declines than the Prairies and Newfoundland and Labrador. In Ontario and BC, declines will "more than retrace the gains made in 2022."

As the Bank of Canada raised its policy rate higher than anticipated, TD Economics has downgraded its quarterly price growth projections for 2023; prices are expected to be down 13.0% annually in Q2, down by 5.2% annually in Q3, and down by 1.5% annually in Q4.

The BoC raised interest rates seven times in 2022, bringing the policy interest rate from 0.25% to 4.25% in the span of 10 months. The next rate announcement is scheduled for January 25, at which point TD Economics expects the Bank to end its tightening cycle with a further 25 bps increase.

Canadian home prices

Canadian home sales are expected to bottom sometime in early 2023 as well. Even so, sales levels will likely remain depressed throughout the year due to the "poorest affordability backdrop since the late 80s/early 90s." It is likely that 2023 will be the weakest sales year since 2001.

On a positive note, TD Economics projects that growth in Canadian home sales and prices will return to positive territory, on an annual average basis, in 2024.

By then, inflation should be contained, leading the BoC to lower interest rates, and the economy will have begun to recover from a "weak" 2023. These factors, along with population growth, will spur stronger sales activity, albeit at a slower pace than was seen pre-pandemic.

Increased demand will lead to price growth, although affordability will continue to be a constraint. Less affordable markets in Ontario, BC, and the Maritimes will see restrained growth, while there will be mild outperformance in the Prairies and Newfoundland and Labrador.

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