The Canada Mortgage and Housing Corporation’s released its annual Housing Market Outlook Thursday morning, cautioning a long road of affordability challenges and the possibility of a “modest recession” later this year.

Although home prices across the country may soon find bottom -- CMHC’s “best-case scenario” is that price declines will conclude at some point in 2023, thereafter stabilizing amid rising immigration levels -- the national housing agency anticipates year-over-year dips through 2023. The report stipulates, however, that prices will not revert to pre-pandemic levels.

Meanwhile, housing starts are expected to be constrained by labour shortages and elevated material and project financing costs. According to CMHC's baseline forecast, total housing starts are expected to lag from 261,849 starts in 2022 to 211,917 in 2023. An alternate forecast puts 2023's starts at just 176,890.

Both scenarios will undoubtedly exacerbate current housing shortages, particularly with respect to chronically undersupplied markets like Toronto and Vancouver. However, CMHC Chief Economist Bob Dugan notes that the "significant drop in housing starts" is expected to give way to recovery in 2024 and 2025. The report's most optimistic forecast puts total starts at 223,783 in 2024 and 235,347 in 2025.

The report also speaks more specifically to recession risk, saying that a mild recession could be in store. At the very least, the Canadian economy is “likely to see periods of negative economic growth in 2023” -- although downturned conditions are expected to give way to recovery in 2024 and 2025.

As a result of higher mortgage rates, dwindling housing supply, and mounting economic uncertainty, Canadians are expected to flock to the “already strained” rental market, as they have increasingly since last spring. As such, rental conditions are expected to further tighten, which will almost certainly push rents to new heights.

Amid deteriorating affordability, Dugan does allude to a light at the end of the tunnel. “With inflation coming back to the 2% target by the end of the forecast period, mortgage rates will gradually decline, supporting both housing demand and a recovery in the construction of new housing supply.”

Toronto in Store for Supply Constraints

“Affordability, or the lack of it, is still the number one concern for Toronto,” says Dana Senagama, CMHC’s Principal Market Analyst for the Greater Toronto Area and Ontario. Although today’s report forecasts that home prices will continue to slide in 2023, quelled largely by the elevated cost of mortgage borrowing, Senagama says it won’t translate into much reprieve for those in need of housing. “If you’re a first-time homebuyer, if you're a new immigrant housing is still very, very expensive.”

To illustrate, CMHC estimates that, as of the fourth quarter of 2022, the average household required nearly 22% more disposable income than was being earned to qualify for a mortgage on the average-priced GTA home.

According to the report, home prices are poised for an upswing as mortgage rates presumably come down in 2024 and 2025. This will allow for home sales to see a “gradual recovery” with support from millennials in their prime home-buying years, demand brought on by immigration, and the return of sidelined buyers from 2022 and 2023.

CMHC’s report also notes that housing starts in Toronto will be undercut by the interest rate environment and elevated labour and material costs through 2023. Although starts are expected to edge up in 2024 and 2025, the activity is expected to remain depressed, comparatively speaking. Starts are anticipated to drop from 45,109 in 2022 to 28,500 (on the low end) and 33,500 (on the high end) in 2023. By 2025, starts are still expected to be under 2022’s levels.

CMHC housing starts dataCMHC

The report also indicates that over the past three years housing completions have lagged increasingly behind starts. But Senagama cautiously predicts that completions may soon pick up.

“In theory, we should see more completions because there are so many units that are under construction. In fact, at the end of last year, the total number of units under construction was over 100,000 in the Toronto CMA,” she says. “So these units will have to be completed, because, after all, they're under contract to buyers that bought maybe three, four years ago.”

Of course, with the elevated rate environment and continued supply chain issues, an uptick in completions probably won't be immediate, says Senagama, but it’s likely in the long run. And this could mean that the widening gap between housing starts and completions could, potentially, shrink.

Senagama also points out that this is the first year in which rental market data was included in CMHC’s Housing Market Outlook report.

“That’s an important indicator because, as you know, we talk about affordability, but in the Toronto market, the average house price is over $1.2M or whatnot,” she says. “The real affordability conversations have moved to rental and we've recognized that in this report.”

As such, today's report looks at Toronto’s vacancy rate, which is poised to drop from 1.5% in 2023 to 1.4% in 2024 to 1.3% by 2025. It also draws attention to spiking rents in the city, and calls for a “large number of rental apartment completions in 2023 and in the early part of 2024" to offset sliding vacancy.

“We're anticipating that with the continued high levels of immigration, workers returning back into Toronto, and students coming back as well, we will see the vacancy rate remaining very tight. And the supply of purpose-built rental units is still very low and not keeping up with the heightened anticipated demand going forward.”