After a red-hot and record-breaking run that began not long after the onset of the pandemic, Canada’s real estate landscape has seen a dramatic change of events this year when it comes to home prices.
With a fragile economy characterized by sky-high inflation and perpetually climbing interest rates, the country's home prices began to soften in the early spring and continue to drop.
READ: National Home Prices Fall Nearly 7% in September, Down Over $170K from Peak
The unanimous consent among economists and real estate professionals alike is that we can expect lower home prices to stick around for a while. Most recently, in a report released yesterday afternoon, the Canadian Mortgage and Housing Corporation (CMHC) says that the national house price is expected to decline by close to 15% by Q2 2023 from its historical peak in Q1 2022.
The report acknowledges how drastically Canada’s economic and interest rate landscape has changed since the publication of CMHC’s latest housing market report back in April 2022 and since a July forecast report on the economy and housing. In the latter, the CMHC had predicted that prices would fall just 5% by Q2 2023.
“Inflationary pressures have been stronger and more persistent than expected since we published our Housing Market Outlook in April 2022,” writes CMHC deputy chief economist Patrick Perrier in the report.
Thanks to these pressures -- which Perrier attributes to the war in Ukraine and the resurgence of COVID-19 in China -- the report’s forecasts are relatively grim. But, to be honest, we’re getting pretty used to the grim reports these days. Case in point: in a report released yesterday, Royal LePage adjusted its national home price forecast downward.
Row of modern townhouses in Vancouver, Canada
According to Perrier, Canada's average home price is expected to fall to $655,190 by the end of the second quarter of 2023, down from a high of $770,812 in the first quarter of 2022. Despite the predicted price decline, ownership and affordability won’t improve, because lower home prices are offset by rising interest rates. Adding insult to injury for would-be first-time homebuyers, Perrier says that rents will increase with heightened demand, as fewer renter household can access ownership.
In the face of looming interest rate hikes, Perrier says that the Canadian economy will enter a modest recession by the end of 2022 and start recovering in the second half of 2023.
In June, Canada’s annual inflation rate hit a staggering 8.1%, marking a near four-decade high. In August, it declined to 7%, something Perrier highlights is attributed to decreasing energy costs over this period. To combat soaring inflation, the Bank of Canada has been steadily raising interest rates to bring the rate to 3.25% on September 7. Perrier says he expects this policy rate to continue to rise and peak at 4% by the end of this year.
“This policy rate rise is also increasing households’ and businesses’ borrowing rates,” writes Perrier. “As inflation converges back to its target range by mid-2024, the Bank of Canada policy rate will also decline and stabilize at 2.5%, the mid-point of its estimate for the neutral policy rate. Other interest rates will broadly mimic the policy rate over our forecast horizon to 2024.”
According to Perrier, as other economies are also taking actions to reduce inflation with higher interest rates, external demand for Canadian goods and services will weaken. This will add downward pressure on the economy.
“We expect the Canadian economy to enter a recession -- although shallower (or not as severe) than previous ones -- in the last quarter of this year and start recovering in Q3 2023,” writes Perrier. “Canada’s real Gross Domestic Product (GDP) should decline by 2.1% from its Q2 2022 peak to Q2 2023. On an average annual basis, GDP growth should soften from 4.5% in 2021 to 2.8% in 2022. GDP should decline by 1.25% in 2023 and grow by 2.9% in 2024.”
As for home prices, on an annual basis, Perrier predicts prices will grow 2.6% in 2022 compared with 21.3% in 2021 and then decline 6.3% in 2023 and rise again by 2.1% in 2024.
