How Will the Canadian Housing Market Change in the Next few Years, and will Prices Drop?
A report by Desjardins predicts that, in 2023, prices for the Canadian housing market will drop drastically and return to a more stable state. The national average price of a home is expected to decrease by 25 percent from its peak in February of this year.
Desjardins has stated that it anticipates a significant correction in its most recent outlook on the Canadian housing market. This is a shift from its previous forecast, which predicted a 15% drop in average home prices during the same time period. According to Desjardins, this more negative projection is based on less favourable Canadian housing market data and stricter monetary policy measures than expected initially.
The Bank of Canada increased its benchmark interest rate by one full percentage point in July. This caused the rates for borrowing money for mortgages to grow as well. According to the report, more increases are expected to occur this year. The same report stated that house prices had fallen more than four percent each of the three months before February, when the national average home price hit a record $816,720.
Although the forecast was revised, it is still expected that home prices in Canada will be higher than pre-pandemic levels by 2023. The provinces most likely to see the highest price adjustments are New Brunswick, Nova Scotia, and Prince Edward Island, which experienced significant price increases during the pandemic.
In addition, the Desjardins Group predicts that by the end of 2023, the Canadian housing market will have reached a point of stability.
Canadian Real Estate Market – National Statistics – June 2022
Today, the Canadian Real Estate Association (CREA) released statistics that show a decrease in national home sales for June 2022. Out of all homes sold throughout Canada via MLS® Systems, 5.6% fewer were sold from May to June 2022. Although April and May had more significant decreases, home sales returned to slightly below-average levels in June this time of year.
Three-quarters of all local markets reported lower sales, with Canada’s biggest cities being the most brutal hit. This included significant metropolitan areas such as the Greater Toronto Area (GTA), Greater Vancouver, Calgary, Edmonton, Ottawa, and Hamilton-Burlington. In June 2022 alone, unadjusted transactions were 23.9% below the previous year’s record high.
HIGHLIGHTS
- Home sales decreased 5.6% from May to June on a national scale.
- Monthly activity decreased 23.9% below the June record set in 2021.
- There was a 4.1% increase in newly listed properties from the previous month.
- According to the MLS® Home Price Index, home prices decreased slightly by 1.9% from the prior month but increased by 14.9% compared to last year.
- The average national house price fell by 1.8% in June compared to the same month last year.
There was a rise in the number of newly listed residences by 4.1% from May to June due to an increase in new supply, especially in Montreal. In Toronto and Vancouver, there was a slight drop in recent listings. With more new listings than sales last month, the sales-to-new listing ratio decreased significantly to 51%, its lowest level since 2015.
The sales-to-new listings ratio in June 2022 was lower than the long-term average of 55.1%. In June 2022, over three-quarters of local markets were balanced, with the sales-to-new listing being one standard deviation above or below the long-term average. Nationally, there were 3.1 months of inventory at the end of June 2022, gradually growing from the tightest circumstances recorded just six months prior. This measure’s long ranged average is more remarkable than five-month.
Will the Housing Market Crash in Canada?
Nationwide house sales and prices have decreased every month since February 2023, with sharper reductions in the three months leading up to June. However, this slowdown is a ray of hope in an otherwise bleak Canadian housing market picture, and the Desjardins Group anticipates it to continue.
The fall rate in existing house sales will progressively slow as the Canadian housing market stabilizes until the end of 2023. The same may be stated for prices in general. This has led to a downward revision to their June forecast. At the time, we predict that housing prices across Canada will decline by 15% between February 2022 and December 2023.
Housing values are expected to drop by 20% to 25% from their peak. This would mean an annual gain of 1.2% in 2022, followed by a decrease of 11.5% in 2023. The reasons for this bleak prediction include worse statistics this year and more active monetary policy than expected initially, which has resulted in increased mortgage borrowing prices.
The Bank of Canada’s policy interest rate is expected to hit its highest at 3.25% by the end of this year. However, if the Canadian economy does not show any significant improvement—mainly in housing market sales—the Bank may start decreasing rates as early as next year. Based on recent indications, it seems that bond yields have peaked, and markets are already preparing for a potential decrease in interest rates.
Regional Housing Forecast for Canada
It is expected that the Canadian provinces with the most significant price increases during the pandemic will fluctuate accordingly. As a result, New Brunswick, Nova Scotia, and Prince Edward Island may experience more substantial price drops. Widespread Price increases throughout the Maritimes have been partially linked to increased inbound migration from other surrounding provinces affected by the Epidemic.
With the recent transition from full-time telework to hybrid work arrangements, it has become less practical for people to move to cheaper provinces. Consequently, these areas may significantly decrease housing demand in the next few months. Although prices in the Maritimes peaked later than in Ontario and British Columbia, they also fell more gradually.
Before the pandemic, affordability was already decreasing in popular cities like Toronto and Vancouver. Since then, it has only gotten worse as small towns have experienced the sharpest price hikes during this time. Consequently, the downward trend in Ontario and British Columbia has been more drastic than in other areas.
The Desjardins Group predicts that the rate of price decrease will decelerate as foreign immigration, return to work, and increased affordability continues to drive the Canadian housing market.
Quebec prices started decreasing later than in other parts of Canada and haven’t fallen as steeply. In April, the average home price was just over $510,000, compared to over $1 million in Ontario and British Columbia in February, when the national average peaked. Quebec’s adjustment is milder.
The original prediction for a 20% decrease in house prices by 2023 has been revised to reflect the market’s quick return to balance. The new estimate takes into account larger-than-expected mortgage rate rises and stands at a 17% decrease from June values. Across Canada, many provinces have experienced price drops, with some reaching as high as 10%.
The oil-producing provinces of Alberta, Saskatchewan and Newfoundland & Labrador are set to benefit from post-pandemic ‘tailwinds’ in the form of higher commodity prices. The resulting increase in employment will lead to increased demand for housing and upward pressure on prices – with sales expected to dip less significantly than in other areas of Canada over the next two years.
Unlike other commodity-rich provinces, Newfoundland and Labrador’s sales may suffer since spikes in oil prices have less direct consequences on its economy. Manitoba’s housing market is steadier than most others. It won’t be unaffected by the rise of interest rates and slowing global growth, but with a more diverse economy and more minor imbalances between supply and demand, it should avoid a disastrous correction.
Bottom Line: Canadian Housing Market Outlook 2023
The Canadian housing market has been in a slump for some time, leaving many families feeling the effects. In the next 18 months, we expect both house sales and prices to continue dropping sharply. This shift will help bring rationality back to the Canadian real estate market; however, it does not negate or diminish the hardships Canadians are currently facing as a result of this downturn.
We expect the decrease in prices will help to rebalance markets and improve affordability. The Canadian housing market is one way that the Bank of Canada contributes to fighting inflation, and we believe that the slowdown will sufficiently reduce pressure on inflation for the Bank to reverse some interest rate increases next year. This combination of events should prepare the conditions for a stable recovery.