Canada's housing market to reach the bottom of downturn this spring

Condo towers in downtown Vancouver. (Shutterstock)

Canada’s housing market has been in a free fall since March 2022, but when will it reach the bottom?

Based on a new economic analysis by RBC this week, it should happen sooner than later — sometime in Spring 2023.

This is due in part to the Bank of Canada’s decision to hold its key interest rate at 4.5% as of this week for March 2023’s update. RBC is predicting the Bank of Canada will hold the existing rate of 4.5% through early 2024, at which point they will gradually lower it by 1.5% to reach 3% by late 2024 or early 2025. Expect mortgage rates to adjust to this, providing overstretched mortgage holders with some relief.

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However, the Canadian real estate market will only begin to see the light at the end of the tunnel, as the housing correction has yet to run its course.

RBC is forecasting a 15% peak-to-trough decline in home prices across the country, with about half of this decline still to come. This includes a peak-to-trough dip of 19% in Ontario, 16% in British Columbia, and 6% in Alberta.

It should be noted that this only offsets some of the immense home price gains earlier in the pandemic between late 2020 and February 2022.

“The dramatic swing in the market since March 2022 is a cyclical event marking the transition out of highly unusual circumstances—a global pandemic and exceptionally low interest rates. Structurally the market is sound,” reads the forecast.

“Inventories are still historically low (albeit rising modestly) and there are no signs of overbuilding virtually anywhere in the country. Canada’s population has grown the most in generations over the past year, and booming immigration will keep that going over the medium term. We believe solid fundamentals will come to the fore in 2024 once the market has adjusted to higher interest rates.”

The slowdown in home sales nationwide has significantly moderated since Fall 2022, mainly because housing activity is now already deeply depressed in most markets, which leaves little remaining downside. The only exception to this would be a major economic recession.

The housing market recovery will slowly begin later in 2023, especially with affordability issues and the weakened economy holding back prospective homebuyers. This pace of recovery will gradually pick up in 2024 when the economy stabilizes, market inflation softens, and the Bank of Canada begins to trim down its key interest rate imposed since March 2022.

Immense new immigration flows into Canada over the next few years will help drive demand, especially in the hot spots of British Columbia and Ontario.

But RBC warns that Canada’s homebuilding efforts are “nowhere near enough to meet supercharged demand.” It estimates new housing supply must grow by at least 270,000 units annually by 2025 just to accommodate the growth in new households, never mind addressing housing affordability for existing residents.

Canada saw 190,000 new home completions in 2019, and about 220,000 in 2021 and 2022.

The ability to build more homes is also potentially challenged by the significant labour shortages in the construction industry.

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