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Here’s how interest rates could affect Canada’s housing market in 2023

WATCH: Last year was a roller-coaster ride for the real estate market, but what will 2023 bring as Canada’s economy still contends with inflation, high interest rates and fears of a recession? – Jan 5, 2023

Lower interest rates in 2023 could revitalize Canada’s housing market before the end of the year, according to some economists, even as the central bank warns the rate cut conversation is premature.

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A report from Desjardins Economics released Thursday expects home sales in Canada to “reach a low in the second half of 2023 before lifting off again.”

Some provinces such as Ontario and British Columbia should see a return to higher prices next year as a result, the report argues, putting a “brake” on any improved housing affordability.

The revised market outlook points to a possible drop in the Bank of Canada’s benchmark interest rate as driving the housing sector’s resurgence, as well as strong demand from immigration and higher purchasing power from robust household savings and a tight labour market.

The Bank of Canada signalled last month it would pause further changes to its policy rate while it lets its aggressive rate hikes from the past year take effect.

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The central bank’s own surveys released earlier this week show some market watchers are expecting rate cuts before the end of the year.

Governor Tiff Macklem pushed back on the idea after a speech in Quebec City on Tuesday, telling journalists: “It’s really far too early to be thinking about cutting rates.”

“We are pausing interest rate hikes to assess whether we’ve raised interest rates enough to get inflation all the way back to target,” he said Tuesday. “The question is really whether we’ve done enough. It’s not about whether we’re considering cutting interest rates.”

But Macklem also conceded that the pause in rate hikes might have a stimulating effect on the sector, as buyers and sellers who have been on the sidelines waiting for the peak of rates seize the temporary sense of clarity.

“The fact that we’ve paused may bring people back into the market. These are things we’re going to have to watch,” he said.

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Randall Bartlett, Desjardins’ senior director of Canadian economics and one of the report’s authors, tells Global News that the expected pause in rate hikes is already driving down some mortgage rates, opening the door for some prospective buyers.

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When markets anticipate future cuts, that drives down longer-term bond yields, he explained in an email, which feeds into fixed-rate mortgage products.

Desjardins expects five-year fixed-rate mortgages on offer to continue to drop as the Bank of Canada maintains its key rate, with variable-rate products following suit if and when cuts eventually begin.

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“Falling borrowing costs should be a major driver of the (housing market) rebound,” the Desjardins report says.

How much further does the housing correction have to go?

The Desjardins report notes the housing correction has already been pronounced: existing home sales are down 38 per cent from the peak roughly a year ago, with the average sale price down 20 per cent from the market’s latest highs.

There’s still further to go, the report’s authors argue, as high interest rates will “continue to weigh on housing market activity.”

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“As such, there is likely more pain ahead for Canadians, including a recession in 2023,” the report states.

For the Bank of Canada’s part, it said in a revised outlook last month that the housing market is expected to continue cooling through to mid-2023 before rebounding slightly.

Royal Bank of Canada’s assistant chief economist Robert Hogue, meanwhile, said in a note Tuesday that Canada’s housing correction appears to be “broadly easing.”

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He said he expects the housing market to bottom out around the spring or summer, with the timing varying from market to market.

“The recovery that will follow, however, is poised to be very gradual at first,” he wrote. “We expect the massive increase in interest rates will continue to hold back activity and compress purchasing budgets for some time.”

What could housing look like across Canada this year?

The Desjardins report also expects the housing correction and subsequent rebound will vary by province.

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The report puts Ontario and B.C. in similar boats, classified as the “most vulnerable” to further corrections in their housing markets in 2023.

Ontario, for instance, is expected to finish 2023 with home prices down 25 per cent from their peak, with housing activity returning to pre-pandemic levels by the end of next year.

But the two provinces’ reputations as attractive hubs for immigration will “underpin” the recovery for their respective sectors, the report argues.

Quebec is meanwhile expected to see a further 20 per cent decline in home sales before hitting a 10-year low, the report projects, before starting a gradual climb back up in 2024.

While Desjardins’ economists remark that the Maritime housing markets have shown some resiliency in the correction with little price decline through 2022, there might be early signs of a downturn heading as the pandemic-related migration boom starts to wane.

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Strong commodity activity and prices are expected to boost economic output in the Prairie provinces, per the report, and the housing market should get a lift accordingly.

The relative affordability of Calgary, Edmonton and Winnipeg will make each city an attractive destination for immigration as well, Desjardins’ economists argue.


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