Canada's housing market downturn will "intensify and spread": RBC

Canada’s housing market is being “weighed down” by high interest rates. With further hikes on the way, the market is in for a chilly fall.

In a report published earlier this week, Robert Hogue, assistant chief economist at RBC, said that the cooling trends that emerged in housing markets this past spring are still “firmly” in place across the country, with resale activity and prices falling further in August.

The majority of markets in Ontario, British Columbia, and Quebec are now operating “well below” pre-pandemic levels, Hogue said, with price corrections further fuelled by easing demand-supply conditions and “souring” sentiments on behalf of buyers.

“Rising interest rates are pushing many buyers to the sidelines and reducing the purchasing budget of others. Our expectations for the Bank of Canada to hike its policy rate to 3.5% by the fall will keep chilling markets in the months ahead,” Hogue said.

“We see the downturn intensifying and spreading as buyers take a wait-and-see approach while ascertaining the impact of higher lending rates.”

Toronto and Vancouver — Canada’s least affordable markets — face the greatest risk due to their “excessively stretched” affordability and outsized price gains. The suburbs and exurbs around the two cities have seen the most significant price drops to date, he noted.

However, buyers in Toronto “haven’t given up,” Hogue said. Though still below pre-pandemic levels, home resales rose 11% (seasonally adjusted) between July and August.

The city’s composite MLS Home Price Index fell for the fifth month in a row — down 2.8% to $1,120,000 — and is now 16% below the spring peak. The continued price declines will provide additional opportunities for antsy buyers.

Hogue expects suburban detached homes, which have seen the biggest declines, to experience further corrections in the near term, while condo prices should maintain their resiliency as buyers focus their attention on affordable options.

Meanwhile, in Vancouver, the downturn “is in full swing,” but there are no signs that the market has reached bottom yet.

Resales and activity are continuing to fall — they were down an estimated 4% and 2.2%, respectively, month-over-month in August. Since the peak, home resales are down a staggering 46%, while benchmark prices have tumbled 6.7%.

As in Toronto, Vancouver’s suburbs have seen the biggest price declines. Over the last three months, prices in Pitt Meadows, Maple Ridge, and Port Coquitlam have fallen more than 10%. In parts of the Fraser Valley, which saw “massive” appreciation in 2021, they’re down more than 15%.

“The sharp rise in interest rates and [a] partial return to offices are evidently causing buyers to more significantly reprice properties away from Vancouver’s urban core,” Hogue said.

“We expect activity to stay quiet in the months ahead in the entire area as the market continues to adjust to the new realities. Higher interest rates are a big pill to swallow for buyers facing some of the steepest home prices in Canada.”

In Montreal, resales fell approximately 15% (seasonally adjusted) month-over-month in August and were down 20% on an annual basis.

The city’s price correction also intensified, with the median price of detached homes down 4.5% from July and 9.5% from the peak. The cumulative decline in median condo prices was less pronounced, at 6.1%.

“The sharp downturn seen in other major markets may be spreading to Montreal after all,” Hogue said.

“We think the market will continue [to] weaken in the period ahead as higher interest rates challenge buyers. That said, demand-supply conditions are still balanced overall, which should keep prices from spiralling down.”

In Calgary, a “mild correction” is underway, as the market continues to moderate following a flurry of activity at the start of 2022.

However, even after six straight months of decline — including a 2.2% drop from July to August — home resales in the city remain “brisk” and well above pre-pandemic levels.

Despite tight demand-supply conditions, higher interest rates have begun to weigh on property values. Calgary’s composite MLS HPI fell 1.9% month-over-month in August and has lost nearly 3% of its value since it peaked in May.

“We think the downward trajectory is likely to be maintained near term but we don’t see it accelerating much or at all,” Hogue said.

“The market is relatively affordable, making buyers in the area less sensitive to interest rates than counterparts in expensive cities like Vancouver or Toronto.”