There’s some relief in store for homebuyers in Ontario and Quebec -- that is, if they can secure themselves a mortgage. 

According to a new housing market report from Desjardins, home prices in both provinces are expected to continue to fall.

The report highlights how -- in the wake of a red-hot run that began not long after the onset of the COVID-19 pandemic -- the housing markets have begun to cool across Canada. The warmer months brought a market characterized by rising interest rates, a drop in sales, and a rise in inventory. 

“As a result, we’ve quickly gone from a seller’s market to balanced territory,” write authors Hélène Bégin, Principal Economist, and Chantal Routhier, Senior Economist in the report. “Buyers are waiting on the sidelines, and in some markets where overbidding was rampant, prices are coming back to earth.”

By the end of next year, prices are actually expected to drop further that originally predicted in Quebec and in Ontario. 

Mortgage InsuranceParliament Hill in Ottawa, Ontario, Canada at Sunset

In the meantime, supply shortages, high material costs, and rapidly rising interest rates are putting the brakes on new construction and renovations. “Look for fewer of these projects in the coming quarters in both provinces,” reads the report. 

Desjardins highlights how Canada’s housing market has quickly corrected over the past few months. Notably, average prices in the infamously pricey Ontario and British Columbia are down nearly 15% and 10% respectively from their February peak. Prices in Quebec started falling two months later, but haven’t dropped as much. Quebec's average price topped out around $510,000 in April before slipping 4.0% to below $490,000 in July. Notably, while Quebec home prices have moved in line with June’s forecasts, those figures have been revised downwards.

It’s now expected that, by the end of 2023, Quebec home prices will have fallen 17% from their peak rather than 12% as predicted in June. According to Desjardins’ predictions, prices in Ontario will fall 24% over the same period, compared to 18% previously. 

There are two factors behind this updated forecast, says Desjardins: quickly deteriorating market conditions and perpetual mortgage rate hikes, which have been bigger and faster than anticipated. 

MontrealAerial view of Montreal showing the Biosphere Environment Museum and Saint Lawrence River during Fall season in Quebec, Canada.

Despite this correction, prices will still end 2023 higher than they were at the start of the pandemic, before home prices shot through the roof at record-breaking rates. Desjardins expects them to be about 20% higher in Quebec and 15% higher in Ontario. 

But will this be enough to turn the needle back to a buyer’s market? Potentially; should sales drop further, says Desjardins. “In other words, homes could go for less than asking in some market,” reads the report. “That would be quite a change from the recent buying frenzy. For now, overbidding is becoming a thing of the past in many areas as homes are selling closer to list price.”

Despite the price drops, affordability won’t actually improve any time soon, thanks to climbing interest rates and harder stress tests, highlights the report. 

We can also expect less constructions and renovations in both provinces. “Many potential buyers will have to put their new builds on hold due to rising borrowing costs and high prices,” reads the report. “In the meantime, homeowners who can afford to can renovate. But after surging during the pandemic, renovation spending is expected to slow.”

New construction will take a bigger hit than renovations, says Desjardins. In Quebec, housing starts are expected to decline by 11.5% this year and 21.7% next year. Although Ontario housing starts remained strong in the first half of the year, they’re poised to drop close to 20% in 2022 and 30% in 2023. 

In both provinces, single-family starts will fall more sharply after spiking in the early waves of the pandemic, with a smaller decline in semi-detached homes, row houses, and condominiums. "These types of homes tend to be popular with first-time buyers, but demand for them will likely cool," reads the report. "Many households will continue to rent, putting additional pressure on the rental market."

High building costs and faster-than-expected rate hikes are jeopardizing the profitability of some projects cautions the report. "Highly leveraged developers are having to cancel or postpone projects, while those in better financial shape are moving forward with new construction," it reads. "But rental apartment construction has already started to slow slightly."

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