The Canada Mortgage and Housing Corp. is calling for a steeper decline in the Canadian housing market amid higher-than-expected inflation and interest rate hikes so far this year.
The Crown corporation said in an updated housing outlook released Thursday that it believes the national average home price in Canada will fall 14.3 per cent by the second quarter of 2023, as compared with the historical peak of $770,812 seen in the first quarter of this year.
Back in July, CMHC had said that a “high interest rate scenario” would see average home prices decline five per cent over the same period.
“What has changed is, really I would say, the inflation context,” CMHC deputy chief economist Patrick Perrier tells Global News.
The latest inflation reading from Statistics Canada showed prices rose at an annual clip of 7.0 per cent in August, with the “core” metrics staying hot. The Bank of Canada has made it clear since that its benchmark rate will need to rise higher still before the end of the year to tame inflation.
CMHC expects the central bank’s policy rate to hit 4.0 per cent by year’s end, up from 0.25 per cent at the start of 2022.
“It turned out that those inflation figures and inflation pressures have been stronger than what we expected, therefore requiring the Bank of Canada, but also other central banks to be more aggressive with their policy rates,” Perrier says.
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John Pasalis, president of Toronto-based brokerage Realosophy, tells Global News that CMHC’s projections for home price declines are “certainly very possible.”
He says that while Toronto has already experienced steep price declines this summer and is likely to see prices hold relatively stable going forward, other areas of the country could see further cooling in the spring.
Both sellers and buyers are in a holding pattern as rates are rising, Pasalis says, and are waiting to see where the central bank’s policy rate lands before getting back into the market. Many sellers could test the market again in the spring, he argues, which would put a bit more inventory up for sale at that time.
Recession would also weaken housing demand
CMHC is also joining a growing chorus of forecasts that expect Canada will fall into a recession in the near future, predicting the national economy — of which housing represents a significant chunk — will hit the downturn before the end of 2022.
The agency said it expects the recession to be “shallower” than most, a sentiment shared among Royal Bank of Canada and Deloitte, which have also forecast a looming recession.
A recession — or even fears of a recession — could cut down demand in the housing market, Pasalis says, as concerns of job losses and lower earnings drag down buyer activity in the months ahead.
Re/Max said last month that fears of a recession were prompting 41 per cent of Canadians to put their plans to either buy or sell a home on pause, according to a survey the brokerage had commissioned.
“That may lead to more downward pressure (on prices),” Pasalis says.
CMHC noted in its report that drops in sale prices will not see housing affordability meaningfully improve, as rising rents, higher mortgage rates and reduced household income in 2023 will limit renters’ ability to achieve homeownership.
The rental market will bear the brunt of the pain from increasingly unaffordable homes, Perrier says, as those priced out of buying a home will remain renters.
Higher interest rates “transfer pressure” from the ownership market to rentals, he says.
CMHC said in its report that once interest rates stabilize, home-buying demand should return, putting upward pressure on prices again. The agency expects the average home price will rise 2.1 per cent in 2024.
“Canada’s house prices will resume their upward trend in the second half of 2023 as demand rises with the recovery in economic and income conditions and mortgage rates begin normalizing,” CMHC said.
Renters boxed out of the ownership market may well make the leap when rates stabilize again, Pasalis says, but he believes price growth at this time will be “gradual.”
Buyers can have more confidence in price dynamics going forward, he argues, as Canadian real estate is not likely to experience more sudden interest rate shifts like those seen at the start of the pandemic in 2020 or so far through 2022.
“We’re not going to see a shock like we saw during COVID when the Bank of Canada slashed rates virtually to zero. We’re unlikely to see that again,” Pasalis says.
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