Canadian home prices may drop further as affordability gap widens: PBO

Canada home prices could fall as much as 23 per cent from peak levels this year alone, as rising interest rates make current price tags increasingly unaffordable for would-be buyers, according to scenarios outlined on Thursday by Canada’s independent budgetary watchdog.

While Canada’s average resale price has fallen seven per cent from February’s peak, the gap between what homes cost and what the households can afford to pay for them has jumped sharply in the last eight months, Parliamentary Budget Officer Yves Giroux said in a report.

“This increase is attributable to higher mortgage rates, which lower household borrowing capacity,” the report said. High debt service ratios could lead to more home price declines.

The Bank of Canada has raised its policy rate by 300 basis points in just six months and warned there is more to come, sending commercial mortgage rates sharply higher. The prime rate now sits at 5.45 per cent compared with 2.45 per cent earlier this year.

Canada’s affordability gap – the difference between what a home costs and what a household can afford to pay for a home – has widened to 67 per cent from 45 per cent in December 2021, the report said. By comparison, the gap was 20 per cent in late 2019 and just two per cent in 2015.

Home prices surged more than 50 per cent during the pandemic and, even with the recent pullback, remain 84.6 per cent above January 2015 levels, according to data from Canada’s realtors.

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Cities that posted the largest gains – like Halifax, Nova Scotia and Hamilton, Ont. – could see the biggest declines, the PBO scenarios showed, with Halifax prices down as much as 30 per cent and Hamilton losing up to 25 per cent.

The scenarios foresee price declines in all 11 major markets, though the PBO made clear they were not forecasts.

Canada’s ruling Liberal government has pledged billions to double the pace of homebuilding over the next decade and help more people buy their first home, in an effort to solve an ongoing affordability crisis.